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Yesterday marked another day in what feels like a continuous holding pattern across various asset classes. While US equities experienced a slight pullback, US yields managed to recover some of the ground lost on Friday. FX market exhibited tight ranges, but with notable divergent behaviour as Mexican Peso (MXN), South African Rand (ZAR), and Thai Baht (THB) outperformed, while Chilean Peso (CLP), Swedish Krona (SEK), and Norwegian Krone (NOK) traded with a weak tone.
Looking ahead, the key events for the week appear to be backloaded, with the European Central Bank (ECB) meeting, payrolls data, and remarks from Federal Reserve Chair Jerome Powell scheduled for Thursday and Friday. Until then, the market seems poised to remain in a state of anticipation, deliberating on potential catalysts that could break the current low volatility regime and introduce some divergence or idiosyncrasy into the markets.
All eyes are on Powell, especially regarding his commentary on the January data and whether any anomalies are perceived. Atlanta Fed President Bostic expressed concerns about businesses exhibiting excessive exuberance, potentially leading to a surge in new demand after a rate cut, adding to inflationary pressures. Bostic hinted at a rate cut in the third quarter, followed by a pause to assess the impacts amid prevailing uncertainties.
Moving to Asia yesterday morning, attention shifted to China's two sessions and Premier Li Qiang's Government Work Report. Key economic indicators such as GDP growth, inflation, fiscal targets, and employment goals were largely in line with expectations. China aims for a GDP growth target of "around 5%", a CPI inflation target/ceiling of "around 3%", the creation of "more than 12 million" new urban jobs, and an urban surveyed unemployment rate of "around 5.5%."
While no major surprises emerged, there were some positive developments, including the announcement of issuing ultra-long central government special bonds over the next few years to address concerns over local government funding shortages. The language around liquidity, emphasizing the avoidance of artificial funding circulation, hints at a potential stabilization in liquidity levels. Omission of "houses for living in, not speculative" suggests further easing of demand-side policies in the property market.
Despite the prevailing mid-term bias for the Chinese Yuan (CNH) to weaken, recent sessions have witnessed a sharp increase in short-term downside protection due to the exceptionally low volatility, reflecting a cautious stance against a potential sentiment snapback.
In the FX market, EURCHF performed remarkably well yesterday, defying slightly firmer Swiss Consumer Price Index (CPI) numbers. The pair surged, breaking free of the 200-day Moving Average, and closing above 0.9600, boosting confidence in Swiss Franc (CHF) shorts, a prevailing significant position in the market.
A noteworthy observation is the substantial uptick in Japanese Yen (JPY) shorts in the futures market last week, as indicated by CFTC data.
Insights Inspired by Goldman Sachs: Credit to Their Analysis for Shaping Some Aspects of This Text
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