Treasury Yields Are Blowing Out, Slowing Dollar Plunge

The recent frantic moves in Treasurys and the dollar continued on Monday as we enter what is set to be a juggernaut of a "rollercoaster week", and while the dollar collapse seems to have slowed for now, this is as a result of an acceleration in the Treasury selloff, with 10Y yields blowing out to 2.72% for the first time since early 2014, and now deep into what Jeff Gundlach called the "danger zone" for equities.

The TSY weakness is also hitting German Bunds, where the 10Y yield rose to 0.682%, the highest since 2015 and rapidly threatening another VaR shock should the selloff accelerate from here.

Also of notable: the German 5-year bond yield rose as much as 4bps from the open to turn positive for the first time since Dec. 2015, rising as high as 0.012% after ECB Governing Council member Klaas Knot over the weekend said there isn’t a single reason to continue with the QE program.

For once, the Greenback is a broad winner, if very modestly, as high/rising US Treasury yields, now at levels last seen in early 2014, are finally offering the USD some support after 7 weeks of losses, while month-end rebalancing is also prompting short covering given buy signals and latest weekly CTFC spec positioning showing another increase in shorts. The DXY looks firmer above the 89.000 level, but really needs to extend recovery gains beyond 89.500 for a more sustained retracement and to prevent bears from further attacks on key supports below 88.500.

“The higher Treasury 10-year yield is spurring dollar-buying,” said Ko Haruki, head of the financial solutions group at CIBC World Markets (Japan) in Tokyo. “The dollar is consolidating with major currencies failing to break Thursday’s highs.”

Meanwhile, the yen fell after Kuroda’s comments on stronger inflation. GBP/USD slid as much as 0.5% to 1.4094 amid media reports that the Conservatives are poised to trigger a vote of no confidence in U.K. PM May.

The Swiss franc fell versus all G-10 peers amid speculation of possible Swiss National Bank intervention first spurred leveraged buying of USD/CHF, before sellers responded and pulled the pair back down; SNB declined to comment on the matter.

The euro weakened as German bonds retreated for a fourth day, while the Stoxx Europe 600 Index turned lower after benchmarks were mixed in the Asian session.

After trading mixed early in the session, European tech stocks retraced much of their earlier gains on Monday, as traders cited the previously noted report that Apple has cut production as much as 50% for the iPhone X.  Nikkei Asian Review says Apple has alerted suppliers it has cut its production target for the flagship phone to 20 million units in Q1, from a previous estimate of 40 million envisaged in November. Apple suppliers Dialog Semiconductor DLGS.DE, STMicroelectronics STM.BN, Infineon IFXGn.DE, IQE IQE.L and AMS AMS.S all fade gains shortly after the report, though all five stocks remain up on the day after AMS reported results well ahead of expectations

In terms of sector specifics, material names outperform following price action in the metals complex with Rio Tinto, Anglo American, Glencore, Antofagasta and BHP all near the top of the FSTE 100. Elsewhere, focus has also been on the IT sector with AMS (+20%) and Wirecard (+1.7%) soaring in the wake of earnings. Other notable equity specific newsflow includes Sanofi acquiring Ablynx (+3.5%) for EUR 3.9bln and a double upgrade at BAML for Volkswagen (+1.5%) with BAML commenting on whether the Co. could be a potential break-up candidate.

Earlier, Asia-Pac bourses traded mixed: the ASX 200 (+0.4%) and Nikkei 225 (Unch.) opened positive with Australia buoyed by M&A activity including AWE shares which rose 16% on reports of a bid from Mitsui & Co., while Japan stocks were less decisive with price action dictated by currency moves and the stronger yen killed early upside equity momentum.

Notably, Chinese stocks slumped the most in 2 months as large caps retreated.  Equities in Hong Kong also fell, while the big-cap CSI 300 Index loses 2% as of 2:49pm local time. Shanghai Composite Index closed down 1.3% while the Shenzhen Composite Index fell -1.7%. Some Chinese investors are closing their books before Chinese New Year, which means inflows to the stock markets will slow, said Frank Lee, acting chief investment officer for North Asia at DBS Bank (HK) Ltd.

Elsewhere, U.S. oil fell, though it’s at about its strongest level in five months relative to Brent as a weaker dollar and falling stockpiles boosted the American marker. Metals advanced amid optimism over global growth and the impact of the softer greenback, with zinc soaring to the highest level in more than a decade.

Bitcoin climbed, holding its value above $11,000 even after a heist of nearly $500 million in a different digital token spurred calls for more cryptocurrency regulation

Janet Yellen’s final policy meeting as Federal Reserve chair will be the main focus of investor attention in what’s shaping up to be another active week for markets still finding their feet after the recent dollar selloff. There’s a string of fresh economic data due, as well as a State of the Union address from President Donald Trump and earnings releases from the world’s biggest tech companies.

Bulletin Headline Summary from RanSquawk

  • The USD regains some ground against its major counterparts as US 10yr yields break above 2.7%
  • European equities have kicked the week off with little in the way of sustained direction
  • Looking ahead, highlights include US personal consumption and PCE data, NZ trade, ECB’s Coeure


Market Snapshot

  • S&P 500 futures down 0.3% to 2,868.75
  • STOXX Europe 600 down 0.01% to 400.53
  • MSCI Asia Pacific down 0.08% to 187.07
  • MSCI Asia Pacific ex Japan up 0.02% to 613.88
  • Nikkei down 0.01% to 23,629.34
  • Topix up 0.06% to 1,880.45
  • Hang Seng Index down 0.6% to 32,966.89
  • Shanghai Composite down 1% to 3,523.00
  • Sensex up 0.8% to 36,332.10
  • Australia S&P/ASX 200 up 0.4% to 6,075.41
  • Kospi up 0.9% to 2,598.19
  • German 10Y yield rose 5.1 bps to 0.682%
  • Euro down 0.2% to $1.2406
  • Italian 10Y yield rose 4.3 bps to 1.738%
  • Spanish 10Y yield fell 0.7 bps to 1.402%
  • Brent futures down 0.6% to $70.11/bbl
  • Gold spot down 0.1% to $1,348.48
  • U.S. Dollar Index up 0.2% to 89.23

Top Overnight News

  • Donald Trump’s presidency would “end” if he followed through on efforts to fire Robert Mueller, the special counsel leading the investigation into Russian interference in the 2016 U.S. election, said Senator Lindsey Graham
  • Trump’s Infrastructure Plan Hits Early Roadblock Over Funding
  • Massive Cryptocurrency Heist Spurs Calls for More Regulation
  • The European Central Bank has to end its quantitative easing as soon as possible, according to ECB Governing Council member Klaas Knot, who said there’s not a single reason anymore to continue with the program
  • Sanofi Leapfrogs Novo With $4.8 Billion Cash Bid for Ablynx
  • U.S. Is Said to Consider Building 5G Network Amid China Concerns
  • The bumpy journey toward Brexit reaches another fork in the road this week as the upper chamber of the British  parliament plans to rewrite a key piece of Prime Minister Theresa May’s legislation
  • Billionaire Singh Brothers Accused in Suit of Siphoning Cash
  • Germany’s Social Democratic leader said he needs concessions from Chancellor Angela Merkel to sell party members on staying in her government
  • Noble Group Said to Reach In-Principle Deal to Restructure Debt
  • Ingvar Kamprad, Ikea’s Swedish Billionaire Founder, Dies at 91
  • Brexit Woes Mount for May, Fox Says ‘Foolish’ to Challenge Her
  • Europe Closes In on Fresh Trade Deal as Trump Puts Up Barriers
  • Sentiment among London’s Brexit-hit bankers sank to its gloomiest depths since the 2008 financial crisis, a survey showed - a stark contrast to the bullish tone of finance executives gathered last week in Davos, Switzerland
  • Japan’s Vice Minister for International Affairs and currency chief Masatsugu Asakawa says officials are watching foreign-exchange markets closely as volatility has increased

Asia-Pac bourses traded somewhat mixed, as the region failed to maintain the early broad momentum from last Friday’s gains on Wall St. where sentiment was underpinned by earnings and in which all major indices closed at their all-time highs. ASX 200 (+0.4%) and Nikkei 225 (Unch.) opened positive with Australia buoyed by M&A activity including AWE shares which rose 16% on reports of a bid from Mitsui & Co., while Japan stocks were less decisive with price action dictated by currency moves. Both the Hang Seng (-0.6%) and Shanghai Comp. (-1.0%) initially conformed to the gains in which the former continued to post fresh record levels, although the tone later deteriorated amid increases in money market rates after the PBoC skipped open market operations, coupled with underperformance in Shenzhen where Leshi fell limit down for a 4th consecutive day. In addition, Wynn Macau was a notable  underperformer in Hong Kong and slumped around 5% due to allegations of sexual misconduct by Wynn Resorts Chairman, CEO and founder Steve Wynn. Finally, 10yr JGBs are mildly lower as prices fell amid an initial positive risk tone in the region and alongside spill-over selling from their US counterparts, while the BoJ’s Rinban operation was relatively light with the central bank in the market for only JPY 435bln of JGBs. PBoC skipped open market operations for a net daily drain of CNY 140bln.

Top Asian News

•    Moody’s Cautions Vietnam Against Further Monetary Easing
•    Fitch Sells Stake in China Rating Firm Amid Market Opening
•    Alibaba, Foxconn Invest $350 Million in Chinese Car Startup
•    India Does Not Rule Out Fiscal Consolidation Pause This Year
•    China H Share Euphoria Enters New Stage as Laggards Surge


European equities have kicked the week off with little in the way of sustained direction (Eurostoxx 50 flat) after a relatively mixed session during Asia-Pac trade. In terms of sector specifics, material names outperform following price action in the metals complex with Rio Tinto, Anglo American, Glencore, Antofagasta and BHP all near the top of the FSTE 100. Elsewhere, focus has also been on the IT sector with AMS (+20%) and Wirecard (+1.7%) soaring in the wake of earnings. Other notable equity specific newsflow includes Sanofi acquiring Ablynx (+3.5%) for EUR 3.9bln and a double upgrade at BAML for Volkswagen (+1.5%) with BAML commenting on whether the Co. could be a potential break-up candidate.

Top European News

  • Offshore Cash Spike Rattles World’s Biggest Covered-Bond Market
  • Le Pen’s National Front Slips in First Votes of the Macron Era


In currencies, the Greenback is a broad winner (for once), as high/rising US Treasury yields are finally offering the USD some support, while month end rebalancing could also prompt short covering given buy signals and latest weekly CTFC spec positioning showing another increase in shorts. The DXY looks firmer above the 89.000 level, but really needs to extend recovery gains beyond 89.500 for a more sustained retracement and to prevent bears from further attacks on key supports below 88.500.

  • USD/JPY has bounced off 108.50 again, but remains top heavy around 109.00 amidst offers at the big figure and a fib just above (109.07).
  • EUR/USD is straddling 1.2400, but firmly supported above a 1.2344 Fib and via hawkish comments from ECB’s Knot, while Cable has retreated sharply from post-Brexit vote highs (1.4345) to 1.4100 or a few pips under amidst more UK political and EU divorce agreement uncertainty.
  • USD/CAD is back up near 1.2350 after mixed NAFTA noises as some reports suggest progress and others big sticking points.
  • USD/CHF around the middle of a 0.9335-0.9385 range with the SNB declining comment on any intervention
  • AUD/USD and NZD/USD have both backed off from recent 0.8100+ and 0.7400+ peaks on the back of softer metals/commodity prices and cross currency flows (clear rebound over 1.1000 in AUD/NZD).

Very busy week ahead, with US President Trump’s State of the Union address, January’s FOMC meeting and the first NFP release of 2018.

In the commodities complex, WTI crude futures marginally extended above the USD 66.00/bbl level while Brent remains above USD 70bbl. Notable energy newsflow has included comments from the Iranian oil minister who stated that output declined in some oil fields due to lack of resources and added that Iran will seek lower production in coming years if it cannot be fixed. In metals markets, gold trades modestly lower as prices are hampered by the reprieve seen thus far for the USD. Elsewhere, focus has been on Zinc with prices surging to their highest levels in over 10 years amid speculation of contracting global supply. Iranian Oil Minister Zanganeh stated that output declined in some oil fields due to lack of resources and added that Iran will seek lower production in coming years if it cannot be fixed. JP Morgan raised their 2018 WTI forecast by USD 10.70/bbl to USD 65.63/bbl, and Brent forecast by USD 10/bbl to USD 70/bbl citing OPEC's efforts to rebalance the market.

Kicking the week off the big focus today should be in the US with the December PCE core and deflator data due, alongside the personal income and spending data. Also due to be released is the Dallas Fed manufacturing activity index for January while late in the evening we’ll get the December jobless and retail sales data in Japan. Away from this, China’s NPC Standing Committee is due to kick off a two-day meeting in Beijing in which it’s expected that a revision to the constitution will be discussed. EU ministers will also meet in Brussels where they may decide on a new set of directives for Brexit negotiations. Elsewhere, the sixth round of NAFA talks are expected to conclude in Montreal and the ECB’s Coeure and Lautenschlaeger will also speak.

US Event Calendar

  • 8:30am: Personal Income, est. 0.3%, prior 0.3%
  • 8:30am: Personal Spending, est. 0.4%, prior 0.6%; Real Personal Spending, est. 0.4%, prior 0.4%
  • 8:30am: PCE Deflator MoM, est. 0.1%, prior 0.2%; YoY, est. 1.7%, prior 1.8%
  • 8:30am: PCE Core MoM, est. 0.2%, prior 0.1%; PCE Core YoY, est. 1.5%, prior 1.5%
  • 10:30am: Dallas Fed Manf. Activity, est. 25.4, prior 29.7


DB's Jim Reid concludes the overnight wrap

It’s a potentially electrifying week ahead with a number of the big rolling themes at the moment having fresh data points for us all to pore over. It’s fair to say that inflation is absolute key to macro at the moment and therefore the most watched print of the week will likely be average hourly earnings in Friday’s payroll report. With regards to inflation and wages we also have the US PCE core and the deflator readings today, the US ECI index on Wednesday, the flash January CPI report for the Euro area also on Wednesday with country level reports out in Germany (Tuesday) and France (Wednesday) and US unit labour costs and productivity on Thursday.

In today’s pdf we copy a chart from DB’s Marcus Heider’s inflation weekly from Friday night where he showed that periods of US$ weakness have typically been associated with higher inflation in developed markets over the past twenty years. He also discusses how Oil prices have benefited from news of another (counter-seasonal) weekly decline in US crude inventories and that recent news imply upside risks to oil price forecasts.

Regular readers will know we think that a number of variables are stacking up at the moment towards higher inflation and a combination of these two factors above potentially adds to the story.

Outside of inflation and labour costs, Friday’s payroll report will be a focus (consensus 180k, DB at 210k) as will tomorrow’s first State of the Union address by Mr Trump. It’s not entirely clear yet what he will talk about but expect the recently passed Republican tax reform bill, trade, the state of the US economy and markets, infrastructure proposals and immigration to all potentially play a part. We also have the latest Fed meeting on Wednesday which Mrs Yellen will chair for the last time with Jerome Powell taking over next week. This meeting could be a bit of a non-event with the next rate hike pencilled in for the March meeting (market pricing currently around 95%). DB continue to expect four rate hikes in 2018 (one above that implied by the Fed dot plots). Away from this, Thursday will be a busy day for manufacturing sector data with the final global PMIs due along with the ISM manufacturing in the US. Finally, earnings season will really ramp up this week with 120 S&P 500 companies due to report, including the turn of some of the big tech heavy hitters including Facebook, Microsoft and eBay on Wednesday, and Alphabet, Amazon and Apple on Thursday. Pfizer, McDonald’s (both Tuesday), AT&T, Boeing (both Wednesday), Shell, Alibaba (both Thursday), ExxonMobil and Chevron (both Friday) are amongst other notable companies scheduled to release results. The full week ahead is published at the end.

The week is off to a mixed start in Asia, with the Kospi 0.74% up, the Nikkei is broadly flat while the Hang Seng (-0.16%) and China’s CSI 300 (-1.05%) are down as we type. The YEN jumped 0.76% back on Friday after Governor Kuroda noted that on inflation “…I think we’re finally close to the target”, but over the weekend, the BOJ clarified the Governor did not revise the inflation outlook and his view is in fact no different to the bank’s Outlook for Economy Activities that was released earlier last week. This morning, the YEN is c0.2% weaker. Elsewhere, Bloomberg reported that hackers have stolen $500m of digital tokens from Japanese crytocurrency exchange Coincoin Inc. back on Friday.

In other news over the weekend, the ECB’s Knot noted QE should end as soon as possible as “the program has done what could realistically be expected of it” and there is not a single reason to continue with it. Further, he added there there’s enough proof for the ECB to end the program, which is also the current sentiment in the governing council.

Ahead of tomorrow’s state of the union address, Friday’s Davos speech by Mr Trump gave us some clues as to his current mood. Initially he noted the US would “no longer turn a blind eye” to what he described as unfair trade practices and will “enforce our trade laws and restore integrity to the trading system”. That said, his other remarks seemed a bit less protectionist. He noted the US is “open for business” and that “now is the best time to bring your money....jobs…businesses to America”. Further, he noted that he would always promote “America First”, but he added “America first does not mean America alone. When the US grows so does the world”. Elsewhere, he said “I may terminate NAFTA, I may not”. So lots bubbling along until his big speech.

Now recapping other markets performance from Friday. US equities rose to fresh highs following strong corporate results, including Intel (shares +11%) and Abbvie (+14%). The S&P (+1.18%), Dow (+0.85%) and Nasdaq (+1.28%) were all higher as all sectors within the S&P advanced. European markets were all higher too, with key bourses up 0.3%-0.7% (DAX +0.31%; Stoxx 600 +0.50%; FTSE +0.65%). The VIX fell for the first time in four days to 11.08 (-4.3%).

Over in government bonds, core 10y bond yields were 2-4bp higher with UST up 4.3bp to a fresh 3.5 year high (2.661%), while Bunds and Gilts rose 1.7bp and 3.2bp respectively. In currencies, the US dollar index extended its three year low (-0.36%), while the Euro and Sterling gained 0.25% and 0.13% respectively. WTI oil strengthened further, up 0.96% to $66.14/bbl (+4.5% for the week). Elsewhere, precious metals were slightly higher (Gold +0.06%; Silver +0.63%) and other base metals were mixed but little changed (Copper -0.60%; Aluminium -0.24%; Zinc +0.29%).

Away from the markets and onto some of the Brexit headlines. In Davos, President Trump said he would have taken a “different attitude” to Brexit talks and that “….I’d have taken a tougher stand in getting out”. Back home, the UK opposition Labour Party leader Corbyn reiterated “we’re not asking for a second referendum” on Brexit and that the UK should have a regulatory environment that is “commensurate with the EU, but must also have power to influence EU rules after Brexit. Elsewhere, a Guardian/ICM poll showed 47% of respondents would favour another referendum once the terms of UK’s departure are clear. If excluding those without a view, 58% of respondents would support a second vote on Brexit. There is also lots of press (incl. Bloomberg) here in the U.K. suggesting that PM May is under increasing pressure within her party to exercise control with rival factions repeatedly speaking out with competing Brexit visions. A vote of no confidence and leadership battle is increasingly being discussed, as per Bloomberg.

Over in Germany, Ms Merkel seemed a bit more open to compromise in order to further progress in the coalition talks with the SPD. The CDU state premier KrampKarrenbauer noted that “our scope (to negotiate with the SPD) is very narrow”, but Ms Merkel noted the preliminary agreement with the SPD is an “outline”, which suggests some room for negotiations in order to finalise talks by 4th February.

We wrap up with other data releases from Friday. In the US, the 4Q GDP was below consensus at 2.6% annualised (vs. 3%).Our US economists noted that despite strength in consumer spending, growth in the quarter was impacted by an outsized increase in imports and materially less inventory accumulation than expected. Net exports subtracted -113bp from headline growth while inventories were an additional -67bp drag. They expect the latter will likely reverse, hence they have raised their Q1 real GDP growth forecast to 3.1% (from 2.3% previously).

The 4Q core PCE was in line at 1.9% qoq while personal consumption was slightly above market at 3.8% (vs. 3.7% expected). The December durable goods orders (ex-transportation) was in line at 0.6% mom but the prior month was upwardly revised by 0.4ppt, while core capital goods beat at 0.6% mom (vs. 0.4% expected). Finally, the December advance goods trade balance deficit widened to -$71.6bln (vs. -$68.9bln) and wholesale inventories grew 0.2% mom (vs. 0.4% expected). In the UK, 4Q GDP was above market at 0.5% qoq (vs. 0.4%) and 1.5% yoy (vs. 1.4%). Elsewhere, France’s January consumer confidence was slightly below  expectations 104 (vs. 106) but manufacturing confidence was above at 113 (vs. 112 expected), which is back to November levels that was a c11 year high.

What to look out for on Monday: Kicking the week off the big focus today should be in the US with the December PCE core and deflator data due, alongside the personal income and spending data. Also due to be released is the Dallas Fed manufacturing activity index for January while late in the evening we’ll get the December jobless and retail sales data in Japan. Away from this, China’s NPC Standing Committee is due to kick off a two-day meeting in Beijing in which it’s expected that a revision to the constitution will be discussed. EU ministers will also meet in Brussels where they may decide on a new set of directives for Brexit negotiations. Elsewhere, the sixth round of NAFA talks are expected to conclude in Montreal and the ECB’s Coeure and Lautenschlaeger will also speak.