Tight labor markets and inflation
The movers on the market today
Today we get the Eurozone HICP flash data for January. We expect a decline to 4.7% from 5.0% in December, with the German VAT effect coming out of inflation. However, it seems that the New Year’s price adjustments somewhat counteract the effect of the VAT. Several national personalities, including the German, have already surprised on the upside.
In the United States, we receive the ADP employment report; It’s usually not a very good indicator for non-farm payrolls, but it tends to move markets nonetheless.
We will also keep an eye out for the OPEC+ meeting and another production surge.
Finally, Denmark will release January data on foreign exchange reserves.
The overview in 60 seconds
WE: The most interesting result from yesterday’s ISM manufacturing release was the rebound in the prices paid component from 68.2 to 76.1, indicating that underlying price pressure is still high and that companies are still likely, at least eventually, to pass on increased costs to consumers (consistent with what companies report in other surveys). The JOLTS survey showed an increase in job vacancies from an already high level.
Fed: Other Fed members spoke yesterday. Among the highlights were views on quantitative tightening, which could begin as early as the second quarter, would likely be significant and could even include the outright sale of assets at some point.
New Zealand: Unemployment was 3.2% in the fourth quarter – the lowest on record. It follows the trend observed in other countries of very tight labor markets.
Shares: The rally in stocks continued yesterday, with gains spread across regions, styles and sectors. One sector, utilities, against the tide and for once we have found the good old negative correlation between bonds and equities. The bottom line being that the strong performance was not led by technology and growth companies, but rather by value-heavy banks and energy which led the advances. It’s interesting to see how optimism plays into volatility with the VIX making another big move lower yesterday. The last four sessions have taken the VIX from 32 to 20. In the US, Dow +0.8%, S&P 500 +0.7%, Nasdaq +0.8% and Russell 2000 +1.1%. The few Asian markets open this morning are also up with Japanese stocks advancing almost 2%. Futures in Europe and the US in the green, led by technology following strong earnings reports after the US Treasury close yesterday.
FI: Germany’s Schatz topped the ECB’s deposit rate for the first time since 2016, reflecting the selloff in recent days and the move to the new BKO. The bearish steepening of the markets yesterday occurred following a long-term underperformance, which after a few days of underperformance, the 5-year point largely followed the 10-year point. We believe that market prices are already very advanced, both in the front-end (2022) but also in the central bank policy-sensitive 5-year point. After the initial BTPs-Bund spread tightening on Monday, the spread is within 1bp of its Friday closing level. With other peripheral spreads broadly unchanged since Friday, we believe that the re-widening of the BTPs-Bund spread is due to the underlying political situation which still presents the same underlying issues.
Effects : The Big Picture: EUR/USD edged closer to 1.13 yesterday amid improving risk and despite US data showing still elevated underlying inflationary pressure and a tight labor market.
Credit: Yesterday we saw a slight improvement in risk sentiment in the credit universe. This coincided with higher activity in the primary arena, where we saw for example Ericsson printing a 5yr EUR benchmark bond at MS +98bp. Itraxx main tightened 1.1bp to 57.8bp and Xover tightened 4.4bp to 281.7bp.