US yields have risen enough for bonds to resume their safe haven role

Markets

Yesterday, Investor confidence faded throughout the day and eventually resulted in even a risk-free standard repositioning. Positive risk sentiment in Asia, buoyed by the prospect of further PBOC easing, initially provided only modest encouragement to European investors. US stocks tried to do better despite mixed US data, including an unexpected jump in US weekly jobless claims as bumpy omicron activity (286k vs 231k expected). US stocks’ initial gains of 1.5%/2.0% were apparently seen as an opportunity to offload more risk. The European indices ended near the best levels of the day (EuroStoxx +0.73%). However, a massive sell-off in the US late in the session resulted in losses of up to 1.30%. The risk this time also supported a (temporary?) change in momentum in bond markets. Lately, bond selling/raising rates in anticipation of Fed rate hikes accelerating has weighed on risky assets. Yesterday, some investors would have concluded that US yields had risen enough for bonds to resume their safe-haven role. US yields and the end of the day fell between 3.2 bps (2-y) and 6 bps (5 & 10-y). The move was more or less equally divided between real returns and inflation expectations. A decline in oil prices did not help support sentiment. European yields ended with modest losses between 0.7 bps (2 years) and 2.1 bps (30 years). Minutes of the ECB’s December monetary policy meeting showed some members (hawks) had reservations about both the ECB’s inflation assessment and the proposed policy package. monetary. Even so, it doesn’t look like the hawks have had the power to profoundly alter the ECB’s anti-inflationary strategy anytime soon. In the forex market, the dollar initially showed no clear trend. However, at the end of US trading, FX also reverted to a “standard” risk aversion move. The yen slightly outperformed the dollar (USD/JPY closed at 114.11). Meanwhile, DXY rallied to close at 95.73. EUR/USD drifted further south in the big 1.13 figure (near 1.1312). The British pound initially traded strongly, with EUR/GBP setting a new cycle low, but the British currency gave back some of its gains in the late session repositioning (near EUR/ GBP at 0.8317).

Yesterday’s end-of-session setback in the US spills over to Asia this morning with regional indices losing up to 2.%+ (Australia). Core (US) yields continue to fall. At the same time, the dollar fails to extend yesterday’s rally. (EUR/USD 1.133, USD/JPY 113.85). The green calendar is slim with only the EC Consumer Trust slated for release. Risk sentiment will continue to set the tone for trading heading into the weekend. We don’t see a trigger for short-term improvement. Markets will also be watching closely the meeting between US Secretary of State Blinken and Russian Foreign Minister Lavrov in Geneva. However, there are currently few signs that tensions over Ukraine will soon ease. The US 10-year rate is retesting the previous resistance of 1.77%/1.80%. A breakout would herald a new rebound in core bonds. The dollar is off to a bad start this morning, but from a daily perspective, we are giving the US currency the benefit of the doubt. UK retail sales this morning were significantly weaker than expected (-3.7% M/M). Coupled with lackluster risk sentiment, this likely limits further gains for the pound from a daily perspective.

News headlines

Japanese inflation accelerated from 0.6% to 0.8% y/y in December last year. Underlying metrics stabilized at 0.5% (excluding food) and even eased to -0.7% (excluding food and energy), suggesting that widening price pressures remain limited for now. The result pours further cold water on BoJ rate hike speculation triggered by a Reuters report last week. While the central bank earlier this week changed its inflation risk assessment to balanced, Governor Kuroda later added that the start of policy normalization was “definitely not” on the table. The Japanese Yen is appreciating this morning, although this is solely the result of Asian risk aversion. USD/JPY is trading at 113.82.

UK consumer confidence GfK unexpectedly fell from -15 to -19 in January, the lowest level since the shutdowns in early 2021. Confidence in the economy in the year ahead fell from -24 to -32. A three-point drop from 1 to -2 (the lowest since November 2020) reflects growing concerns about personal finances over the next 12 months. Savings intentions are near 2021 lows. GfK’s Staton explained that consumers are “clearly bracing for soaring inflation, rising fuel bills and the prospect of higher interest rates”, suggesting that the The cost of living crisis was now the main concern instead of the pandemic.

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Garland K. Long