January 17, 2024
Last Friday’s post revealed my instinct that something wasn’t “feeling” right. I still can’t shake this sensation as we mark the first half of the week. Maybe it's just noise, as we have basically been trading only a full day post-MLK holiday on Monday, but some moves are notable and worth exploring.
The USD strength is somewhat unsurprising, given the sell-off in bonds. US 10-year yields are back at the 200-ema line, while our momentum model is still long (bonds) for now.
The USD strength and bond negative momentum gathered pace yesterday evening after Waller's speech, Almost as Good as It Gets…But Will It Last? ignited hawkish impulses across markets. March cut pricing was reduced by 10 bps (25 to 15 bps) on the day. Nothing in his remarks was new in my view relative to any other previous comments as he endorsed careful cuts (not >25 bps steps as some market participants were maybe hoping for).
Let’s hope US inflation doesn’t see the dynamics witnessed in Canadian numbers, where we have seen a re-acceleration in inflation, in line with expectations, and a larger jump in the core reading, with core, trim and median measures printing higher than expected at 3.7% and 3.6% respectively. This limits the chances of a near-term dovish pivot from the bank.
Similarly, this morning's UK inflation figures also showed a higher-than-expected print of 4.0% in December, from 3.9% in November, above the consensus of 3.8% but below the MPC’s forecast in November’s Monetary Policy Report of 4.6%.
Meanwhile, the PBoC kept the MLF rate unchanged at 2.5%. Markets were convinced of a cut, with yields falling sharply, as highlighted last week (Chinese 10-year yields are back at March 2020 level). The market now seems to think that the risks of an RRR cut have increased as the policy direction still remains firmly towards easing.
It is also important to note that China is de facto exporting deflation to the rest of the world at the moment. Worth keeping in mind as we go through the year.
Let’s now look at what else has been flagging and whether any of this week’s market gyrations have changed anything.