US data surprises to the upside

• There was positive data from the US overnight, as industrial production grew more than had been expected in January, growing by 0.9% m/m, compared to expectations of 0.4%. This compares to 1.3% growth the previous month. Total utilisation has climbed to 75.6%, the highest level since February, before the Covid-19 pandemic began to impact the US economy. Retail sales also exceeded expectations in January, surging 5.3% m/m, compared to predictions of 1.1% and the previous month’s -0.7% fall. This will further fuel the reflation debate, and could make it more difficult for President Joe Biden to implement his USD 1.9tn support package in full.
• For those watching for any change in tone by the Federal Reserve, the minutes from the January meeting released yesterday showed that the board members were as yet unconcerned by any inflationary risk. They noted that ‘economic conditions were currently far from the Committee’s longer-run goals and that the stance for policy would need to remain accommodative until those goals were achieved.’
• CPI inflation in the UK rose to 0.7% y/y in January, up from 0.6% the previous month. Food, hotels and restaurants, and furniture prices were among the drivers of the acceleration. An expected normalisation in activity as the vaccine rollout continues, combined with higher prices at the pump and disruption related to Brexit, will likely keep inflation fairly elevated over the coming months, diminishing the case for negative interest rates.
• The UAE is reported to be considering implementing a cap on prices for foods such as chicken and milk, as global prices continue to climb. Food and water security minister Mariam Almheiri said that the issue was being looked at closely. The UAE imports some 90% of its food, and with housing and food the biggest component of the CPI basket it represents a potential driver of inflation.

Today’s Economic Data and Events

• Turkey central bank one-week repo rate decision: 15:00, forecast hold at 17.00%
• ECB meeting minutes: 16:30
• US initial jobless claims: 17:30, forecast 770,000

Fixed Income

• Bond markets bounced back overnight after several days of sell-offs. A wobble in risk assets helped to shore up USTs where yields have moved to 1-year highs in the last few days. Also helping to puncture the upward move in yields were the FOMC minutes where it was clear Fed policy makers were committed to keeping QE in place and would “distinguish between…one-time changes in relative prices and changes in the underlying trend for inflation.”
• Yields on the 2yr UST slipped almost 2bps to close overnight at 0.1029% while the 10yr pulled back from highs of over 1.33% to close the day at 1.27%. Moves in European benchmark bonds were less pronounced but also saw 10yr yields lower on the day.
• EM bonds, however, remained under selling pressure. Yields on South African 10yr bonds added almost 9bps to 8.714%, Turkish 10yrs held at 12.625% while Indonesian 10yr bonds saw a sharp rise—almost 20bps—with yields hitting 6.459%. Even as nominal UST yields came lower overnight, inflation-adjusted US bonds have seen their yields pick up considerably in the last few days, implying a sustained upward push in USD yields is plausible.

FX

• The dollar had its strongest day since the end of January overnight with the DXY index adding almost 0.5% to close at 90.951. A risk-off move in equity markets helped to push investors toward haven bids, bolstering the dollar while better than anticipated data—wholesale prices, retail sales—affirmed the positive trajectory of the greenback.
• EURUSD fell 0.56% overnight to close back with a 1.20 handle. The optimism around Mario Draghi being appointed as Italy’s new prime minister seems to have evaporated and market attention is on the still fitful start to European vaccination programmes. Draghi told the Italian parliament that a “common public budget” was needed for the EU to support economies during weak patches.
• GBP has also given back some of its recent strength, slipping by 0.3% overnight to close at 1.3857 while the AUD and CAD closed nearly unchanged but the NZD fell a second day running to close at 0.7191.
• In the EM space it was a day of consolidation. USDTRY held at around 6.97 while the INR and EGP saw limited moves.

Equities

• Equity markets lost some ground yesterday despite the positive data from the US, as renewed inflation worries seemingly weighed on sentiment. The higher-than-expected retail sales, alongside the oil outages and potential impact on chip manufacturing caused by the winter storms in the US are all expected to accelerate price growth. The S&P 500 closed just about flat, down -0.03%, while the NASDAQ lost -0.6%. The Dow Jones secured gains of 0.3%.
• In Europe, the FTSE 100 and the DAX both lost -1.1%, while the CAC closed -0.4% lower. The composite STOXX 600 lost -0.7%.
• In Asia, the Nikkei index in Japan lost -0.6% yesterday after several days of strong gains, but is trading up 0.2% so far this morning. The Shanghai Composite is currently up 1.1% having returned today from several days of holiday.
• Within the region the DFM lost -0.6% and the Tadawul -0.2%, while the EGX 30 closed -1.1% lower.

Commodities

• Oil markets remain bound to the deep freeze affecting Texas at the moment where as much as 4m b/d of US output may be disrupted. Brent futures settled up 1.6% overnight at USD 64.34/b and have pushed above USD 65/b in early trade today. In WTI front month futures closed up 1.8% at USD 61.14/b overnight and are just shy of USD 62/b in early trading today. Product prices are also extending gains with gasoline and heating oil futures rising overnight along with a near 3% rise in US natgas futures.
• Oil markets got another helping hand from a reported draw in US crude stocks of almost 6m bbl last week according to the API. EIA data will be released later today with a smaller draw in stocks expected. The full impact of the freezing conditions will begin to show up in data over the next few weeks.
• Metals markets were mixed. Gold prices extended their declines for a fifth day in a row, down by over 1% at USD 1,776/troy oz while silver managed to gain 0.5% and both PGM markets were down by around 0.8%. Industrial metals were uneven with a 1.4% rise in LME aluminium (USD 2,115/tonne), copper down by 0.2% (USD 8,390/tonne) and iron ore up slightly at USD 163/tonne.

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