Not that it should be a surprise but the possible more aggressive approach by the Fed in reversing its policy is not going to influence what the ECB is going to do according to ECB president Lagarde. She said today in an interview, “The cycle of the economic recovery in the US is ahead of that in Europe. We thus have every reason not to act as rapidly and as brutally that one can imagine the Fed would do.” She doesn’t want to sound so dovish now at this point as she followed by saying, “But we have started to react and we obviously are standing ready, to react by monetary policy measures if the figures, the data, the facts demand it.” The ECB is currently expected to end its PEPP in March which by April would take their monthly bond purchases to 40b euros per month from 80b. Then in Q3 that would fall to 20b and then eventually end I believe one quarter later. After that, if they attempt raising interest rates it likely won’t come until 2023. Since the ECB went negative in June 2014, the Euro STOXX bank stock index is down 34%. From the peak in 2007, they are lower by 78%.
And thus it should be no wonder why the monetary policy stance Draghi took and followed by Lagarde was not the right approach since about 80% of lending in the Euro region is done via its banks. That said, the bank stocks will hugely benefit when NIRP ends, mitigated though by their large holdings of European sovereign bonds which will be in trouble when rates rise. We’re certainly getting an early taste of that. After 4 days of weakness, European bonds are rallying today and US Treasuries are following in sympathy.
Euro STOXX Bank Stock Index
Making Lagarde’s job that much more difficult was the German PPI for December seen today where it spiked by 5% m/o/m, well more than the estimate of up .8% and up by 24.2% y/o/y. The German statistical office said they’ve never seen a print this high since the stats began in 1949. Of course it was only 20+ years earlier that the Weimar Republic was in charge. Energy prices led the way but even ex energy prices still rose 10.4% y/o/y. As PPI is not a market mover typically, inflation breakevens are down slightly as are bund yields after yesterday’s taste of zero for the 10 yr.
GERMAN PPI
French business confidence in January fell 2 pts to 107 and that was below the estimate of 109. That’s the weakest since April and we can blame omicron as services and retail fell while manufacturing rose to a 4 yr high and employment was unchanged. The French 10 yr oat yield sits just below a 3 yr high.
After doing so last month, Chinese banks cut again their loan prime rates for one year and 5 yr terms. The former by 10 bps and the latter by 5 bps. This follows the move by the PBOC a few days ago. So the analogy is this, get drunk on credit, have a bad hangover and instead of drinking a lot of water to hydrate, we’ll give you another shot with that water to ease the discomfort. Industrial metals are rising in response with iron or prices up 2%+ to the highest level since late August. Copper is up 1%+ and nickel prices are rising to a 10 1/2 yr high.
Central banks in Indonesia and Malaysia both left rates unchanged as expected after the Bank of Korea hiked again last week. Even the Turkish central bank kept rates at 14% and the lira is bouncing a touch.
IRON ORE
NICKEL (on LME as of yesterday and up again today)
Exports out of Japan in December were higher by 17.5% y/o/y, just above the estimate of up 15.9%. Imports jumped by 41% vs the forecast of up 43%. Not surprisingly auto’s and semi’s led the export strength. The value of imports are exploding higher because Japan imports so much of its energy needs after shutting down most of their nuclear plants. I still remain positive on uranium by the way. And Japanese stocks too.
Australia added a bit more jobs than expected in December and its unemployment rate fell down to 4.2% from 4.6% with a 66.1% participation rate, well above ours. The news is putting more pressure on the RBA to end QE next month and eventually raise rates. The 2 yr Aussie yield is higher for the 6th straight day and by 21 bps in this time frame. The Aussie$ is higher for the 3rd day in 4.
Aussie 2 yr yield (the Oct spike was when YCC ended)
Yesterday Investors Intelligence said Bulls fell to 39.8 from 43.7 and about half went to the Bear side and the other half to Correction. Bears rose 2 pts to a still low 25. Confirming the shift in sentiment, which should not be a surprise since mood follows price was today’s AAII data. AAII said Bulls fell for a 3rd week by 3.9 pts to just 21. That is the lowest since July 2020. Bears jumped by 8.4 pts to 46.7, the highest since September 2020. Bottom line, optimism has obviously cooled as the Fed begins the process of taking away the punch bowl.
AAII BULLS
AAII BEARS