Credit Agricole

Asia overnight

Risk-off trading dominated the Asian session as the higher-than-expected US inflation reading and hawkish rhetoric from the FOMC’s James Bullard ramped up market expectations of a more front-loaded rate hiking cycle. UST 10Y yields retreated only modestly from their high of 2.05% and remain above 2%. A majority of Asian bourses and S&P500 futures were trading lower at the time of writing. In G10 FX, the Antipodean currencies led the declines against a stronger USD, the NZD not receiving much support from a jump in inflation expectations, which ramped up the chances of a 50bp rate hike by the RBNZ at its next meeting. RBA Governor Philip Lowe added weight to the AUD by repeating earlier dovish rhetoric.

GBP: BoE’s secret policy tool?

The BoE may have rediscovered the benefits of a stronger GBP when it comes to containing imported (cost-push) inflation at its February policy meeting. Indeed, (1) the currency’s moves have traditionally had a strong pass-through effect on the UK domestic inflation and (2) the UK economy relies more on the services sector and less on exports to grow. While we continue to see the GBP as a useful stagflation and risk-aversion hedge, a more proactive BoE tightening in the coming months could ultimately pave the way to a gradual recovery, consistent with our more constructive medium- to long-term outlook on the GBP. We further assume that the stagflation risks to the UK outlook would ease market risk sentiment which would improve in H222. On the day, focus will be on the Q4 GDP data and market consensus is for a fairly strong conclusion of 2021. That said, the monthly GDP data could point at some weakness of economic activity in December, in part due to the reintroduction of pandemic restrictions, which since then have been lifted. To the extent that the data keeps the markets expecting further BoE tightening in coming months, however, the prospect for higher UK rates could continue prop up the GBP.

Citi

European Open

The aftermath of the US CPI loomed over markets with dollar strength driving most of FX markets and weakness seen in equities. High beta currencies AUD, NZD and NOK were down the most. Japan was on holiday today, which meant that UST cash markets were closed. However, Treasuries futures sung in low liquidity with 30y futures implied yields as much as 5bps lower at one stage before paring the move. Front-end remains under pressure with markets still jittery. This jitteriness was not helped by Fedspeak late in the US session, with Daly and Barkin weighing in, following Bullard’s hawkish commentary. Of note was also the market focus on the announcement of a Closed Federal Reserve Board meeting following recent speculation of an intermeeting cut. We note that we would be cautious with this interpretation, as these are regular occurrences. More details below.

Elsewhere, we also note a testimony from RBA Governor Lowe was along the same tune as his rhetoric last week, with little to note. ECB President Lagarde warned early in Asian trading that acting too fast could hinder economic recovery. Meanwhile, we saw MXN and PEN see 50bps rate hikes overnight.

Looking ahead, focus will be on the UST cash markets reopening in London hours. Aside from that we will note U Mich inflation sentiment for USD at 15:00 GMT, alongside any additional impromptu Fedspeak. GBP sees GDP, output and trade balance data at 07:00 GMT, CHF sees CPI at 07:30 GMT. HUF sees a CPI at 08:00 GMT, RUB a rate decision at 10:30 GMT where we expect a 100bps increase to 9.50% and BRL economic activity at 12:00 GMT.