US Interest Rate Adjustment Post-Jobs is Over as the 2-Year Yield Backs Away from 4.50%

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Marc Chandler
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Overview: The capital markets have shrugged off the more than 1% loss of the Nasdaq and S&P 500 yesterday and have jumped back into risk assets. The stocks and bonds have been bought and the dollar sold. Chinese and Hong Kong shares gained more than 1% today. Japan was mixed and Taiwan and South Korean equites saw minor losses. Europe's Stoxx 600 is up over 1%. Nasdaq futures are up nearly 1.2% while the S&P 500 is lagging slightly. European bonds yields are 8-10 bp lower. Sweden's Riksbank was more aggressive than expected with an announcement not only a a 50 bp rate hike but of active bond selling in a couple of months. Its 10-year yield is up almost 25 bp.

The Swedish krona is the best performing G10 currency today, surging 2.3% against the US dollar, which is trading broadly lower. The dollar's jump following last week's extraordinary jump in nonfarm payrolls is being retraced. The rate adjustment in light of the data and Fed comments has been made. This is reflected by the US two-year yield stalling near 4.50% earlier this week and is now back to around 4.40%, which is still 9-10 bp above where it settled last week. A weaker dollar and softer yields are helping gold trade higher for the fourth consecutive session. After falling to almost $1861 at the end of last week, it is pushing above $1885 today. March WTI is also higher for the fourth session. It settled near $73.40 last week and has approached $79 today.

Asia Pacific

Japan's Prime Minister Kishida is expected to name BOJ Governor Kuroda's successor next week. Reports boosting perceptions that current deputy governor Amamiya would get the nod saw the dollar jump against the yen on Monday. The subsequent pullback saw the greenback re-enter the pre-weekend range. Yesterday, Kishida told the Diet that he does not want to unsettle the markets with the appointment. It is widely thought to come down to two candidates, the other is former a former deputy governor, Nakaso. Kishida seemed to emphasize the importance of communication and the coordination with other major central banks. This would seemingly favor Nakaso.

Separately, BOJ and MOF data released yesterday showed Japanese investors continues to sell US, Australian, Danish, and Swedish bonds in December. Although many observers have emphasized the divestment of US bonds, in Q4 2022 Japanese investors sold more French than American bonds (JPY2.08 trillion or almost $16 bln vs. JPY1.54 trillion or nearly $11.8 bln). Japanese investors showed a preference in Q4 for Italian bonds (purchasing ~JPY440 bln). Japanese investors also bought British bonds in November and December (~JPY202 bln) after having sold in September and October (~JPY170 bln), perhaps influenced by the shifting fiscal stance and political turmoil.

The US dollar is softer against the yen but is holding within the range set Tuesday (~JPY130.50-JPY132.70). Yesterday's low was about JPY130.60 and so far, it is holding above it too. The stretched intraday momentum indicators suggest these lows will likely hold. The Australian dollar settled softly yesterday near $0.6925 but rebounded today to test the $0.698 5area.  The Aussie has not been above $0.7000 this week and options for nearly A$710 mln struck there expire today. The 20-day moving average and the (50%) retracement of the drop since last week's high (~$0.7160) is found slightly higher. The Chinese yuan remains confined to narrow ranges that have dominated the last few sessions. In line with the greenback's heavier tone more broadly, the yuan is near the upper end of the recent range. The dollar is holding above yesterday's low (~CNY6.7715). It has not settled this week below CNY6.78, which could be at risk today. The PBOC set the dollar's reference rate tightly to expectations (CNY6.7905 vs. CNY6.7912).

Europe

As widely anticipated, Sweden's Riksbank delivered a 50 bp hike as the new governor (Thedeen relaced Ingves Jan 1) continues the normalization of monetary policy that began last April. The policy rate now stands at 3.0%, and the swaps market sees a peak rate between 3.25% and 3.50%. Additional rate hikes are signaled, and QT will start in the April, which will include bond sales (SEK3.5 bln or ~$340 mln a month). While inflation is accelerated into the end of last year, the economy contracted in Q4 22. Headline inflation reached new cyclical highs in December of 12.3%. The underlying rate that used a fixed interest rate and excludes energy also recorded the cyclical high in December at 8.4%. The next CPI report is due February 20. The economy contracted by 0.5% in both November and December. Last November, the Riksbank forecast that the economy would contract by 1.2% this year. The updated forecasts issued today suggest 1.1% contraction. As both a cause and effect of the economic slump, the housing market has cratered. House and apartment prices are off 15% from their peak after both recorded a 1% decline last month. The euro trended higher against the krona last year and reached a 14-year high earlier this week near SEK11.4435.

Germany's January CPI was due on January 31 but was delayed until today due to a technical adjustment as the base year is changed to 2020 from 2015. Before Covid, German inflation typically fell in January but in 2021 and 2022 it rose. This new pattern continued last month. The German EU harmonized measure was considerably softer than expected, rising 0.5% instead of the 1.3% forecast by economists in Bloomberg's survey after falling 1.2% in December. The year-over-year rate, which peaked at 11.6% last October, eased to 9.2% from 9.6%. Nevertheless, increase is about 0.5% higher than Eurostat assumed when it estimated the eurozone's January CPI. The risk is that the preliminary aggregate figure is (8.5%) is revised slightly higher when the final reading is announced on February 23.

After slumping to $1.0670 on Tuesday, the euro has recovered nearly a cent It has approached $1.0780 in the European morning, the highest since Monday, when it barely traded above $1.08. There are options for 1.85 bln euros struck at $1.08 that expire today. The $1.0850, which seems a bit far, hold another billion euro in expiring options. There is also a set of options at $1.0750 (1.1 bln euros) that roll off tomorrow. Note that the $1.0810 area is the (38.2%) retracement of the euro's slump from the $1.1035 area seen on February 2. The $1.0850 is the next retracement (50%). Sterling is also extending its recovery and is approaching $1.2160.  There are about GBP440 mln of options at $1.2150 that expire today. Another set for around GBP530 mln expire there tomorrow. The $1.2130 level marked the (38.2%) retracement of its drop from the February 2 high, which was the last time it traded above $1.2400. The (50%) retracement is near $1.2180. The Swedish krona is the strongest of the majors following the hawkish central bank. It has surged 2.4% against the dollar and about 1.6% against the euro. The krona is at its best level in two weeks against the euro.

America

No Fed officials are scheduled to speak today, and outside of the bill auctions and the final leg of the quarterly refunding ($21 bln 30-year bonds), only the weekly jobs claims are on tap. They are expected to have held below 200k for the fourth consecutive week. This has not been seen since last April. Recall that weekly jobless claims spent the better part of Feb through mid-April below 200k. The low print of 166k was reported in mid-March. In June, they averaged about 232k. Still, knowing what the weekly jobless claims, or even condition of the labor market more generally, does little to shed light on the broader economy. Recall that due to trade and inventories mostly, the US economy contracted in Q1 22 and Q2 22. US job growth (nonfarm payrolls) slowed from a monthly average of 445k in H1 22 to 357k in H2 and growth rebounded.

The North American highlight is Mexico's January CPI and central bank meeting. Mexico's headline inflation peaked at 8.7% in August and September last year and fell to 7.80%. It ticked up in December (7.82%) and likely edged higher last month (median forecast is 7.91% in Bloomberg's survey). The core rate peaked in November at 8.51%, it eased slightly in December (8.35%) but looks likely to have firmed a little last month. A quarter-point rate hike is widely expected, which would bring the overnight target to 10.75%. The swaps market sees another quarter point hike and the terminal rate at 11.00%. The risk is on the upside, given the adjustment in market expectations for the Fed and the stubborn Mexican core inflation. Brazil reports the IPCA measure of inflation. The six-month decline through the end of last year may have stalled last month. The Selic rate was lifted to 13.75% last August, where it has remained. It is not yet priced into the swaps market, but President Lula's fiscal policy and questions about the central bank's independence warns of the risk of another small hike later this year. 

The US dollar has been capped this week in the CAD1.3460-75 area against the Canadian dollar and it was successfully tested today.  It has returned offered and is probing support around CAD1.34 in Europe. Yesterday's low was closer to CAD1.3360 and there are options for almost $660 mln at CAD1.3350 that expire today. There are over $1 bln of options struck in the CAD1.3400-15 that expire tomorrow. That said, initial support today may be in the CAD1.3360-70 area and then CAD1.3345. Key support for the greenback against the Mexican peso is a little below MXN18.81. A break could spur a move toward MXN18.70. Last week's three-year low was near MXN18.50. The US dollar is holding up better against the Brazilian real and yesterday rose to its best level since January 19 near BRL5.2450. In doing so, the greenback met the (50%) retracement of this year's decline (around BRL5.21). Recall that it bottomed last week around BRL4.94.