Mixed data out of Germany in January

January data painted a mixed picture of economic activity in Germany, with industrial production surprising on the upside, but retail sales falling. Industrial production rose 3.5% m/m in January, fully offsetting the 2.4% m/m fall observed in December. The uptick was higher than consensus expectations for a significantly smaller 1.4% m/m rate of growth. The improvement was relatively broad-based, with output in the construction, energy and manufacturing sectors all ticking up on the month. Energy-intensive firms in particular saw a rise in production, possibly because of government energy caps coming into effect in January.  German inflation-adjusted retail sales, in contrast, fell 0.3% m/m in January, below expectations for a 2.3% rise. 

Eurozone GDP growth was revised down to 0% q/q in Q4 2022, having come in at 0.1% q/q initially. The downward revision was in part driven by amendments to German and Irish GDP. Growth in the former was revised down to -0.4% q/q in the final quarter of the year from an initial estimate of -0.2%, while Irish Q4 GDP growth was revised from 3.5% to a significantly smaller 0.3%.  This second estimate also included an expenditure breakdown. This highlighted a 0.9% q/q fall in household consumption expenditure, which is the largest drop in consumption in the Eurozone’s history. 

A string of US labour market indicators published yesterday failed to show a significant softening in conditions. The JOLTS report suggested that the number of private sector job openings fell to 10.8m in January from 11.2m in December. Despite this decline, job openings remain at historically high levels, with roughly 1.9 job openings for every unemployed person. ADP private payrolls rose by 242K in February, an increase on the upwardly revised 119K recorded in January. The stronger than anticipated rise was driven by hiring in the leisure and hospitality and financial activities categories. Measures of wage growth moderated slightly but remained at high levels, underscoring the continued tightness.  The much-anticipated NFP data is due to be released tomorrow, with consensus expectations for a gain of 225K.

Japanese Q4 GDP was revised downward to 0.1% on a q/q annualized basis, from an initial reading of 0.6%. The revision was in large part due to weaker private consumption expenditure than had initially been expected.

Today’s Economic Data and Events

• 17:30 Initial Jobless claims w/e 4 Mar: forecast 195K
• 17:30 Continuing claims w/e 25 Feb: forecast 1660K

Fixed Income

• US Treasuries showed some two-way action overnight with gains early in the day and in the early US session unwinding toward the close. Fed chair Jerome Powell spoke to the House Financial Services Committee yesterday but said that no decision had been made about the scale of hikes for the March FOMC and alluded to the upcoming jobs and CPI data as the determining variables in how fast rates will need to go up. Yields on the 2yr UST ended the day higher, settling at 5.0701%, up 6bps. The 10yr UST yield added about 3bps to settle at 3.9913%.
• European bonds extended their recent rallies with yields on the 10yr bund down 4bps to 2.641% while 10yr gilt yields fell by almost 6bps to 3.761%. Emerging market bonds closed relatively quiet with yields on 10yr Turkish bonds up marginally and South African 10yr yields down about 2bps.
• Turkey priced a USD 2.25bn 6yr bond at 9.5%, 25bps tighter than initial pricing.

FX

• Fed chair Jerome Powell’s commentary to a House committee had a slightly more dovish tone than his testimony to the senate but failed to materially affect currency markets. EURUSD spent much of the day trading flat, ultimately ending at 1.0545. GBPUSD fared a little better, adding slightly more than 0.1% to 1.1845 while USDJPY rose by 0.2% to 136.36.
• Commodity currencies had a more mixed performance. The Bank of Canada kept rates unchanged which weighed on the loonie. USDCAD added 0.4% to 1.3805 even as the BoC said it was prepared to hike once again if needed. AUDUSD closed with a modestly stronger bias at 0.6589 while NZDUSD settled unchanged at 0.6107

Equities

• Asian indices largely followed their US counterparts into the red on Wednesday as they digested the implications of Jerome Powell’s hawkish testimony on Tuesday. The Hang Seng dropped 2.4%, while on the mainland the Shanghai Composite ended the day 0.1% lower. South Korea’s KOSPI dropped 1.3%. Japanese indices were the outliers as the Topix gained 0.3% and the Nikkei 0.5%, buoyed by the weaker yen.
• In the US, Jerome Powell struck a moderately more dovish tone than the previous day and there was a partial recovery from Tuesday’s losses for the S&P 500 and the NASDAQ as they added 0.1% and 0.4% respectively. The Dow Jones lost a further 0.2% however. Similarly in Europe, the FTSE 100 added 0.1% and the DAX 0.5% but the CAC lost 0.2%.
• Locally, both the ADX and the DFM ended the day down 0.6%, while the Tadawul closed down 0.6%.

Commodities

• Oil prices remained weak overnight after a substantial drop in response to Powell’s comments on rates earlier in the week. Brent fell 0.8% to USD 82.66/b while WTI fell by 1.2% to USD 76.66/b. Data from the EIA showed a surprise draw in stocks, down by 1.7m bbl last week along with a drop in gasoline inventories (1.1m bbl) while distillate stocks were modestly higher. Oil production fell 100k b/d to 12.2m b/d.