The Week Ahead

A busy week for bond markets witnessed record debt auctions from the US Treasury, including a USD54bn 3-year note and the largest ever 10-year deal amounting to USD42bn, to plug the widening budget deficit. The 10-year was auctioned off at a lower-than-expected yield of 4.093%. All deals were met with widespread demand. Fed chatter, US regional banking news, China deflation concerns, and the build-up to and relatively uneventful BLS inflation revisions also kept markets on their toes. The yield on the 10-year rose 15bps to 4.17%, and the S&P Index soared 1.37% to an all-time high. The dollar gained ground, up 1.92% on the week, as did oil; Brent closed 6.28% higher at $82.19pb.  

The Fed’s Mester last week said policymakers will likely gain confidence to reduce rates “later this year” if the economy stays on its current path, adding that she doesn’t see an immediate need to rush. Kashkari later said the Fed is “on track” to hit the inflation target, adding that “we are not done yet”. In what was a thin data week, the S&P Global US Services and composite PMIs missed expectations. However, the ISM services Index surprised to the upside, and the employment component jumped into expansion. At the end of the week, the BLS inflation revision was marginally unchanged, Q4'23 core prices rising at 3.3%yoy, reaffirming the Fed’s current rhetoric of looking for further evidence of sustainable price decreases ahead of commencing a rate easing cycle. The CPI figures out on Tuesday will therefore be watched very closely. Current estimates for January’s headline and core inflation are: 0.2%mom, 0.3%mom and 2.9% and 3.7%, respectively.  

Last week, New York Community Bancorp (NYCB) had its rating cut to junk by Moody’s, who stated the bank faced “multifaceted” financial risks and governance challenges. The turmoil in the US commercial real estate market has spread to Europe, elevating concerns about broader financial contagion. Germany's Deutsche Pfandbriefbank saw its bonds plunge this week due to worries over its exposure, describing the current turmoil as the "greatest real estate crisis since 2008." The drop in German lenders' bonds is the latest warning sign as rising interest rates eroded property values globally. U.S. Treasury Secretary Janet Yellen said losses will stress owners but are manageable. US office values have been hit especially hard amid a slow post-pandemic return. Some predict the full impact of the escalating crisis may not yet be fully accounted for. 

Elsewhere, China's January CPI defied expectations with a hefty 0.8% year-on-year drop, the most since 2009. This plunge, however, was largely due to the Chinese New Year falling later this year, creating a negative base effect. Digging deeper, a more positive picture emerges as prices nudged up 0.3% month-on-month, fuelled by both food (up 0.4%) and non-food items. Cold weather pushed vegetable prices up 3.8%, contributing to the rise. While February's CPI will still feel the calendar effect, early data suggests a Chinese New Year price surge exceeding 3% in the first week, likely offsetting the drag and pushing February's CPI into positive territory, offering a brighter outlook for China's inflation. Clearly, policymakers will be under pressure to aggressively boost demand. Away from this, we heard last week that Janet Yellen aims to visit China this year, indicating stabilising bilateral relations.  

This week US CPI (Tuesday), eurozone GDP and UK CPI (Wednesday), US retail sales and empire manufacturing (Thursday), the World Governments Summit in Dubai (Monday-Wednesday), US housing starts, PPI and Uni. of Michigan consumer sentiment, and corporate earnings will garner much interest. Central bank chatter this week includes the Fed's Kashkari, ECB’s Cipollone and Lane, and BoE Bailey on Monday. The Fed’s Goolsbee, Barr and ECB’s Vujcic speak on Wednesday. On Thursday we will hear from the Fed’s Bostic, and the BoE’s Mann and Green. The Fed’s Daly and ECB’s Schnabel end the week speaking at different events.  

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