EUR/USD is technically still in danger though with the recent low around 1.0226 acting as key support

Markets

Core bond yields extended their December surge with the long end once again taking the lead. A strong first batch of US economic data did the trick. November JOLTS job openings snapped back to above 8 million and a strong headline services ISM for December was coupled with a sharp rise in the prices paid subseries to the highest since March 2023. The US 2-yr yield added 1.7 bps with money markets gently pushing the next Fed cut further out in time to 2025H2. Yields in the 10-30-yr bucket rose 5.5-6.4 bps. The 10-yr tenor attacked the lower bound of the 4.68- 4.73% resistance band. The $39 bln 10-yr auction yesterday produced a minimal tail with a lower bid-cover than the previous ones. European rates joined the bear steepening move with changes between +0.2 (2-yr) to +5.4 bps (30-yr) in Germany. European CPI printed bang in line with expectations, 2.4% y/y and 2.7% y/y for headline and core respectively, and final December PMIs enjoyed some marginal upward revisions compared to the flash release. UK gilts underperformed strongly. Net daily changes varied between 3.8 (2-yr) and 7.3 (10-yr) bps. The 30-yr year added 6.7 bps to hit a new 27-yr high. The same-dated auction yesterday tailed slightly and drew the lowest demand since December 2023. It suggests investor caution for upcoming bond supply after the Labour government’s “one of the largest fiscal loosenings in recent decades” (dixit OBR) presented in October resulted in a near-record £297 bn of planned government bond sales this year. The UK serves as a reminder to other governments in Europe, the US and elsewhere of a fundamentally changed interest rate environment that isn’t as forgiving for huge deficits and massive borrowing as the ZIRP/NIRP one. It’s central in our view for structurally higher long-term bond yields. From a shorterterm point of view, today’s economic calendar may further support the case as well with the ADP job report and jobless claims scheduled for release in the US. They come ahead of Friday’s more important officials payrolls report. Assuming markets this early in the year are not eager to fully let go on some additional Fed easing in 2025 it is the long end that remains the most vulnerable. The modest dollar appreciation yesterday (EUR/USD 1.034, DXY 108.54) reveals that this does not necessarily supports the US currency. We think USD against G10 peers was in fact driven by the risk-off more than anything else. Additionally, the battered euro’s downside is finally looking better protected. We feel a lot of negatives have been priced in by now. The bar for euro area money markets to price in more ECB easing (100 bps this year) is rising. EUR/USD is technically still in danger though with the recent low around 1.0226 acting as key support.

News and views

Real Indian GDP growth for FY 2024-25 is estimated at 6.4% compared to the 8.2% provisional estimate in FY 2023- 24, the statistics ministry reported. The growth deceleration in the 2024-25 FY is mainly due to a developing decline in government capital investments. At the same time private consumption expenditure is expected accelerate from 4.0% to 7.3%. Government consumption also is seen rising from 2.5% to 4.1%. Real GVA of agriculture and allied sector has been estimated to grow by 3.8% during 2024-25 as compared to the growth of 1.4% witnessed in FY 2023- 24. Real GVA of ‘construction’ and ‘financial, real estate & professional services’ has been estimated to observe good growth rates of 8.6% and 7.3%, respectively during the FY2024-25, the ministry Statement reported. The Indian rupee this morning is setting an all time record low against the dollar in the USD/INR 85.84 area.

The Australian Bureau of statistics reported monthly CPI for November to have risen to 2.3% from 2.1% in October. However, the head of ABS price statistics in a comment indicated that the rise was in part due to timing of electricity rebates. The underlying inflation figure showed a mixed picture. The CPI excluding volatile items and holiday travel rose 2.8% in the 12 months to November, compared to a 2.4% rise in the 12 months to October. This rise was also mainly driven by changes in electricity prices. Annual trimmed mean inflation was 3.2% in November, down from 3.5% in October. The latter is an important pointer in the RBA’s inflation assessment and as such is moving closer to the RBA’s 2-3% inflation target. The RBA has its first policy meeting on February 17-18. After holding its policy rate unchanged at 4.35% since November 2023, markets now see a chance of about 75% of an inaugural 25 bps rate cut in February. The Ausie dollar, which has been under pressure from a strong US dollar of late, only showed a limited reaction to the data. At AUD/USD 0.6235, it trades close to recent lows (0.6180 area).

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