It’s too soon to fight the reigning market trends

Markets

Friday’s stellar payrolls and possible consequences for the direction of future US (and global) monetary policy continued to set the tone at the start of this trading week amid an empty eco calendar, tightening financial conditions. US Treasuries lost some further ground in Asian trading and stuck near the intraday lows for most of the European and US session. In the end, US yields added up to 2 bps across the curve. Technical resistance levels came into play at longer tenors. The US dollar faced similar fatigue, though not without setting a fresh correction low at EUR/USD 1.0178. The pair nevertheless ended the session above key support (1.0201; 62% retracement on 2022- 2023 comeback). Both European and US stock markets finished off the intraday lows with the Brent crude rally topping off around $81/b for now.

Market settings improved further overnight on talk that members of president-elect Trump’s incoming economic team are discussing a gradual approach in lifting tariffs aimed at boosting negotiating leverage while avoiding a spike in inflation. One idea would be to gradually increase tariffs by 2% to 5% each month instead of installing the floated minimum tariff of 10% to 20% on all imported goods and 60% or higher on shipments from China by stealth. Last week, the Washington Post ran an article suggesting that tariffs would only apply to critical sectors. Markets rallied in response, but rapidly retraced after president-elect Trump called the report false. Given that the economic team didn’t pitch the idea with Trump himself and with comments on social media expected within the next couple of hours, it’d be fair to err on the side of caution for now when it comes to this kind of stories. In general, we do believe that the worst of the tariff treat is by and large discounted, suggesting asymmetric risks when they will eventually be applied especially if watered-down. From next week on, the uncertainty factor could rapidly shrink as Trump finally takes office. Today’s eco agenda is interesting with US producer price inflation as amuse-gueule ahead of tomorrow’s CPI numbers. An upward surprise could bring back Friday’s chilly market vibes. It’s too soon to fight the reigning market trends.

News and views

Consumer inflation expectations for the year ahead were at an unchanged 3%, the NY Fed’s December survey showed yesterday. Those for the 3-yr and 5-yr horizon picked up to 3% (from 2.6%) and declined to 2.7% (from 2.9%) respectively. Home price growth stayed firmly within the 3-3.3% range in place since August 2023 by increasing 0.1 ppts to 3.1% last month. Turning to the labor market, US households believe earnings growth to slow down to its 12- month trailing average of 2.8% in the upcoming year. The probability of a higher unemployment rate over the same time frame fell to 34.6%. Respondents saw the smallest chance since January 2024 of losing their job in the next 12 months (11.9%) while simultaneously believing that, if it were to happen, finding a new one would be less easy (probability fell sharply from 54.1% to 50.2%). US households expect income growth to decline 0.3 ppts to 2.8%, the lowest since May 2021 but above the pre-pandemic level. Spending growth would accelerate to 4.8% nevertheless. Fewer reported being worse off and more reported being better off in terms of their current financial situations. The year-ahead expectations were more or less unchanged.

The head of the Brazilian central bank’s economic policy department Diogo Guillen said the fiscal outlook of its country still requires attention, despite having met the 2024 primary budget target. The government had set a zerodeficit goal (+/- 0.25 ppts tolerance range on either side). But Guillen said the uncertainties related to achieving the fiscal targets in the next years remain. Fiscal deterioration was perhaps the key reason for the central bank’s decisive 100 bps rate hike and strong guidance of follow-up moves on the next meetings through March. Looking ahead, Guillen said it’s important to assess the impact of upcoming US president Trump’s policies on the economy, exchange rate, expectations and inflation dynamics. Since mid-September when Trump made his comeback in the election polls and combined with the domestic developments, the Brazilian real lost sharply against the USD. USD/BRL hit a record high around 6.3 end-December before paring some gains to 6.09 currently.

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