German 2-Year Yield Rises to Six-Year Highs

<div><a href="https://blogger.googleusercontent.com/img/a/AVvXsEirNRAdZpHN6Kiq4fDrLiQy2n1ewaekOdKHoEIBU7ojKrqRqf_GRabB3j0BqOvJUBrh4JUuiX5vGB3Jt2OlWdxL7ygpdZn7jppiThQbigPUZiHYOZIB3Zc2spMcecWNwzR_nEiqVM7O5cExUS7U-IPYpqPTL84n2iNVHZSSemop_KwmEQb9iKuYaeDpag=s810"><img alt="" border="0" data-original-height="524" data-original-width="810" src="https://blogger.googleusercontent.com/img/a/AVvXsEirNRAdZpHN6Kiq4fDrLiQy2n1ewaekOdKHoEIBU7ojKrqRqf_GRabB3j0BqOvJUBrh4JUuiX5vGB3Jt2OlWdxL7ygpdZn7jppiThQbigPUZiHYOZIB3Zc2spMcecWNwzR_nEiqVM7O5cExUS7U-IPYpqPTL84n2iNVHZSSemop_KwmEQb9iKuYaeDpag=s400" width="400" /></a></div><p><b><span>Overview:&nbsp;</span></b><span>From the pre-weekend low to yesterday's high, the NASDAQ rallied around 7.5% and is trading a little firmer ahead of the US open.&nbsp; Bottom-pickers emerged after the tech-heavy benchmark slid about 20% from its record high late last year.&nbsp; At the same time, a chorus of Fed officials have underscored Chair Powell's message that while a March rate hike is in the cards, there is no forward guidance.&nbsp; All options are open but there is no desire to surprise the market (see BOE last November).&nbsp; Many Asian centers remain on holiday, but Japan, Australia, New Zealand, and India all advanced.&nbsp; Europe's Stoxx 600, with a four-week loss in tow, is up about 1% near midday in Europe, led by industrials and information technology.&nbsp; Benchmark 10-year yields are around 1-2 bp softer in Europe and the US.&nbsp; It puts the 10-year Treasury yield around 1.76%.&nbsp; The dollar is trading off, extending yesterday's move.&nbsp; The major foreign currencies are up 0.25%-0.50%, led by the Scandis and Swiss franc with the euro as a laggard.&nbsp; Emerging markets are led by the freely accessible currencies like the South African rand, Russian rouble, and Mexican peso.&nbsp; The JP Morgan Emerging Market Currency Index is pushing higher after rising over 1% yesterday, the most since before Xmas.&nbsp; Gold is testing the 200-day moving average near $1806.&nbsp; It's low from the end of last week was around $1780.&nbsp; The next technical target is in the $1817-$1825 area.&nbsp; March WTI is stalling ahead of last week's high (~$88.75).&nbsp; A break of $85 could signal a correction instead of consolidation.&nbsp; US natural gas is paring yesterday's 5% gain, while Europe's benchmark is falling another 8% after a slide of similar magnitude yesterday.&nbsp; &nbsp;Copper is trading with a firmer bias.&nbsp; The CRB Index has advanced for the past six consecutive weeks for a nearly 12.5% gain.&nbsp; It rose nearly 1% yesterday.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>Asia Pacific</span></b><span><o:p></o:p></span></p> <p><b><span>The Reserve Bank of Australia will end its A$4 bln a week bond purchases, but Governor Lowe did not moderate his rhetoric as expected to allow for a sooner rate increase.&nbsp;&nbsp;</span></b><span>This sparked a brief wobble in the currency and rates, but market expectations did not change much.&nbsp; The swaps market is pricing in about 110 bp of rate increase over the next year and 25 bp is fully discounted by early H2.&nbsp; Other data today were weaker than expected.&nbsp; The flash January manufacturing PMI was shaved to 55.1 from 55.3 and 57.7 in December.&nbsp; December retail sales slumped 4.4% rather than the 2% expected after surging 7.3% in November.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>After a series of disappointing reports at the end of last week, including December industrial production and retail sales, Japan's data surprised on the upside today.&nbsp;</span></b><span>&nbsp;The January manufacturing PMI stands at 55.4 not the flash reading's 54.6 (54.3 in December).&nbsp; Unemployment unexpectedly slipped lower in December to 2.7% from 2.8%, while the job-to-applicant ratio ticked up to 1.16 from 1.15. Lastly, we note that that the lower house of the Diet passed a resolution today on the eve of the Beijing Olympics, critical of China's human rights and especially its treatment of Uyghurs.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>South Korea's January trade deficit was more than twice as large as expected at $4.9 bln, a new record.&nbsp; Last January, it reported a $3.6 bln surplus.</span></b><span>&nbsp; Exports were weaker than expected rising 15.2% year-over-year, down from 18.3% in December.&nbsp; Imports were also stronger than expected.&nbsp; They were 35.5% higher than a year ago.&nbsp; Economists had projected them slowing below 30%.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The dollar is at a three-day low against the Japanese yen near JPY114.70.</span></b><span>&nbsp; It has nearly retraced half of last week's recovery that lifted it from around JPY113.50 to JPY115.70.&nbsp; The next (61.8%) retracement is near JPY114.30.&nbsp; We suspect the dollar can stabilize and recover a bit in the North American session.&nbsp;&nbsp;<b>The Australian dollar initially fell to about $0.7035 on the RBA's stance, but quickly regained its composure and made new session highs around $0.7090 in late Asian dealings.</b>&nbsp;It is approaching resistance in the $0.7100-$0.7120 area.&nbsp;&nbsp;<b>The US dollar is consolidating within yesterday's range against the offshore yuan.</b>&nbsp; It is little changed around CNH6.37.&nbsp;<o:p></o:p></span></p> <p><b><span>Europe</span></b><span><o:p></o:p></span></p> <p><b><span>There is a significant adjustment taking place that appears to be supporting the euro.&nbsp;&nbsp;</span></b><span>The US 2-year premium over Germany is narrowing for the third consecutive session. It reached 181 bp last week and is now near 167 bp.&nbsp; It is the largest decline in two months.&nbsp; It is largely the function of the backing up of German rates.&nbsp; The German 2-year yield is rising for its sixth consecutive session.&nbsp; During this run, the yield has fallen by about 16 bp to<i>&nbsp;minus</i>&nbsp;0.46%.&nbsp; It is the highest yield in almost six years.&nbsp; The market is pricing in about a 30 bp hike from the ECB over the next 12-months. It looks like the first move is expected later this year.&nbsp; The ECB meets on Thursday.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The eurozone flash manufacturing PMI of 59.0 was trimmed to 58.7 after 58.0 in December.</span></b><span>&nbsp; A downward revision to Germany's reading (59.8 vs. 60.5) and a disappointing Italian report (58.3 vs. 62.0) were responsible.&nbsp; France's stood at 55.5 unchanged from the flash report (55.6 in December). Spain's defied expectations of a pullback and was steady at 56.2.<o:p></o:p></span></p> <p><b><span>Other data were mixed.</span></b><span>&nbsp; France, like Germany yesterday, reported firmer than expected January CPI.&nbsp; It rose by a minor 0.1%, but the market had expected a 0.2% decline.&nbsp; The year-over-year rate edged up to 3.3% from 2.9%.&nbsp; German retail sales collapsed in December, falling 5.5% on the month.&nbsp; It was about four-times larger than expected.&nbsp; On the other hand, the unemployment queues fell by 48k in January, the largest decline since last August.&nbsp; The unemployment rate unexpectedly eased to 5.1% from 5.2%.&nbsp; Italy's December unemployment rate fell to 9.0% from a revised 9.1% in November.&nbsp; Recall that it was at 9.9% at the end of 2019.&nbsp; For the eurozone as a whole, the unemployment rate in December stood at 7.0%, the eighth consecutive decline.&nbsp; It was at 7.5% before the pandemic.&nbsp;<o:p></o:p></span></p> <p><b><span>The UK reported stronger January house prices (Nationwide), and more mortgage approvals and stronger consumer credit growth in December.&nbsp;&nbsp;</span></b><span>The manufacturing PMI was revised to 57.3 from 56.9, but it still fell for the second month (57.9 in December).&nbsp; It is the lowest since last February.&nbsp; The UK government is taking several new initiatives to show that it is not paralyzed by Gray's report or the pending police investigation.&nbsp; It has begun a two-week consultation period to scrap mandatory vaccines for frontline NHS workers.&nbsp; We note that Finland is also lowering its assessment of the Covid threat, including eliminating the virus pass and social restrictions.&nbsp; The Johnson government is also considering committing more soldiers and equipment to NATO.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The euro is firm near $1.1265.&nbsp;</span></b><span>It has met the (38.2%) retracement of the leg down from the peak on January 14 just shy of $1.1485.&nbsp; The next retracement (50%) is around $1.1300, where a 1.55 bln euro option expires today.&nbsp; Support now is seen in the $1.1220-$1.1240 area.&nbsp;&nbsp;<b>Sterling is pushing above $1.35 and is approaching its (38.2%) retracement objective slightly above $1.3505.</b>&nbsp; The next (50%) retracement is near $1.3555, around the 20-day moving average. Sterling bottomed last week by $1.3560.&nbsp; The gains in the European morning have stretched the intraday momentum indicator, suggesting North American dealers may have a difficult time extending the upticks much.<o:p></o:p></span></p> <p><b><span>America</span></b><span><o:p></o:p></span></p> <p><b><span>It is almost as if the Fed orchestrated an effort to calm the rate hike expectations.&nbsp;&nbsp;</span></b><span>Recall many have revised higher, some to seven, hikes this year.&nbsp; The flattening of the yield curve may have also gotten some official attention.&nbsp; Bostic, Barkin, and Daly all seemed to be reading from the same general script.&nbsp; The White House may have also gotten into the act with a press briefing yesterday that noted that in the week of the jobs survey, nine million workers had called in sick or taking care of a sick family member.&nbsp; That said, we note that the implied yield of the December Fed funds futures contract has risen for the last five sessions and is trading a little firmer now.&nbsp;<o:p></o:p></span></p> <p><b><span>Outside of the JOLT report on job openings and December construction spending, today's US data is primarily from the private sector.&nbsp;</span></b><span>&nbsp;Markit's final manufacturing PMI is expected to be little changed from the 55.0 flash reading, which was the lowest since before the 2020 election.&nbsp; The ISM manufacturing reading is expected to fall to around 57.5.&nbsp; It would also be the lowest since November 2020 and would be the third consecutive decline. Prices paid are expected to have fallen for the third consecutive month.&nbsp; The median forecast in the Bloomberg survey looks for 67.0 after peaking last June at 92.1.&nbsp; Finally, are the US auto sales figures.&nbsp; A modest gain to almost 13 mln (seasonally adjusted annual rate) is expected.&nbsp; In January 2021, the pace was 16.6 mln.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>Canada reports November GDP (Bloomberg median 0.4% for&nbsp;3.6% year-over-year pace) and the Markit manufacturing PMI.</span></b><span>&nbsp; The employment data at the end of the week is more important for the markets, but a Bank of Canada rate hike next month is baked in the cake.&nbsp; Mexico reported its economy contracted in Q4 (by 0.1%) but it was the second consecutive quarterly decline in output.&nbsp; The swaps market still has 100 bp of tightening priced in over the next three months.&nbsp; Today, Mexico reports worker remittances (strong) and Markit's manufacturing PMI and IMEF activity indices.&nbsp; Brazil sees the Markit PMI and January trade figures (a small deficit is expected).&nbsp; The central bank meets tomorrow and has pre-committed to a 150 bp hike.&nbsp; It was the most aggressive last year and is perceived to be near a peak, which appears have encouraged foreign flows into the bond and stock markets.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The US dollar is correcting lower against the Canadian dollar rallying 1.5% last week.&nbsp;</span></b><span>&nbsp;It met the (38.2%) retracement objective near CAD1.2665 today and the next (50%) is near CAD1.2625.&nbsp; There is an option for about $570 mln at CAD1.2705 that will be cut today.&nbsp; A move above CAD1.2720 could suggest the correction is over.&nbsp;&nbsp;<b>The greenback's pullback against the Mexican peso has been deeper.&nbsp;</b>&nbsp;It is approaching the (61.8%) retracement objective near MXN20.52.&nbsp; The 20-day moving average is a little lower (~MXN20.5080).&nbsp; Resistance now is pegged around MN20.65.&nbsp;<o:p></o:p></span></p> <p><span>&nbsp;</span>&nbsp;</p><p><br /></p><p><span>Disclaimer</span></p><div>
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