Subdued Tuesday Ahead of Phase One Signing

The latest market highlights and our views on the key developments as G10 FX remains rangebound amid a lack of major releases; UK inflation may give the BoE's doves more food for thought, and the phase one US-China trade deal is set to be signed

Previous Day's Market Highlights

G10 FX parings remained confined to their recent trading ranges on Tuesday, with a lack of data surprises combining with little in the way of impactful headlines to result in quiet trading conditions.

 

US Inflation - Nothing To See Here

Tuesday's only notable data release came from the US, in the form of December's CPI inflation figures. Both headline and core CPI printed broadly in line with expectations, with both inflation gauges increasing by 2.3% YoY as 2019 drew to a close.

Despite falling in line with expectations, the 2.3% headline inflation rate represents the fastest pace of price increases in 14 months, and is also the second straight month that inflation has been above the FOMC's 2% aim -- the first time such an eventuality has happened since mid-2018.

The increase in headline inflation doesn't, however, signify a change in the inflation trend, with the pace of price increases set to remain volatile throughout 2020 -- largely due to expected volatility in energy prices.

As a result, yesterday's print will do nothing to alter the FOMC's policy outlook for the next 12 months, with monetary policy set to remain on hold barring an economic catastrophe -- a 'material reassessment' of the outlook in Fedspeak.

The Fed will, however, likely continue their balance sheet expansion as they attempt to prevent further turmoil in the repo market. This expansion will result in a continuation of asset purchases, with the liquidity that this provides set to continue dampening volatility. There is, however, a real danger that the market will become -- or perhaps has already become -- too dependent on the Fed's continued supply of 'easy money'.

As for Tuesday, the inflation print did little to impact the dollar, with the greenback ending the day flat against a basket of peers.

 

Sterling - Testing Support

Meanwhile, in the UK, sterling's recent decline took temporary respite yesterday, though market participants continued to take stock of the BoE's monetary policy outlook.

The pound's recent decline was arrested by the ascending trend-line support that has held since early-November. As the below chart shows, cable (GBP/USD) took a brief look below this support, before bouncing above the level.

 

The pound ended the day unchanged against the dollar, and against the euro, however any tests of this trendline will be key over the coming days. A break and close below could open up further downside into the low $1.29s. 

 

Earnings - Off To A Strong Start

Turning away from FX for a moment, Q4 earnings season got underway on Wall Street yesterday, with banks being first to report.

Two of the three banks reporting on Tuesday -- JPMorgan Chase and Citigroup -- significantly beat expectations, recording revenues of $29.21bln and $18.38bln respectively, with both driven by significantly higher revenues in FICC (fixed income, currencies and commodities) trading. JPMorgan's results saw the bank record its most profitable year on record, and the best year for any US bank in history.

Things are, however, a little less rosy at Wells Fargo, which is still reeling from the fake account scandal. Revenue at Wells was $19.9bln in the fourth quarter -- in line with estimates -- however earnings per share were just $0.60, half the expected level, due to ongoing litigation costs.

On the whole, bank earnings have started on a strong footing, boding well for the rest of earnings season and indicating the US economy to be in good health. Today, markets will be looking for Bank of America and Goldman Sachs to continue yesterday's trend.

 

Any Other Business

  • G10 FX was, on the whole, subdued on Tuesday, with the Swiss franc the only major mover. The Swissie dipped 0.3% after comments from the SNB indicating that ongoing FX interventions are not intended to give Switzerland a trading advantage compared to global peers.
  • Global equity markets were subdued on Tuesday, possibly due to apprehension ahead of today’s phase one trade deal signing. The pan-European Stoxx 600 ended the day 0.2% higher, while the US benchmark S&P 500 closed down 0.2%.
  • Oil prices, meanwhile, snapped their 4-day losing streak, with global benchmark Brent settling 0.5% higher, and US WTI crude adding 0.2%.
Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1705 1.2081 1.1628 3.75%
GBP/USD 1.3030 1.3514 1.2903 4.52%
EUR/USD 1.1135 1.1239 1.1066 1.54%
GBP/AUD 1.8885 1.9523 1.8635 4.55%
GBP/NZD 1.9695 2.0417 1.9415 4.91%
GBP/CAD 1.7015 1.7794 1.6918 4.92%

Today's Market Highlights

Trade - Signing Day

The day that some thought would never come has at last arrived. This afternoon, after months upon months of tortuous, seemingly never-ending, negotiations, the US and China are finally set to put pen to paper and sign the phase one trade deal.

However, as with everything in the US-China trade relationship, nothing is ever simple. While the deal is set to be signed, it is still unclear exactly what the deal contains and what the two sides have committed to. Furthermore, if yesterday’s reports are believed, tariff rollbacks may not even begin until after November’s election, a rather surprising turn of events to say the least.

Helpfully, White House Economic Adviser Larry Kudlow has indicated that a 'fact sheet' outlining the key areas of the deal will be released shortly after the signing ceremony. Despite this, indications are that the two superpowers may not release the full details of the phase one deal, particularly information relating to individual commodity purchases.

For markets, the signing of phase one has been fully priced in, hence attention has shifted to the second phase of negotiations, and whether a phase two deal will be agreed between the two. As flagged before, phase two will not be as straightforward as phase one, with talks becoming discussions over national security rather than purely over trade.

 

UK Inflation - More Food For the BoE's Doves?

Meanwhile, today's data highlight comes from the UK, in the form of December's inflation figures.

Headline CPI is expected to have remained at 1.5% YoY for a 2nd consecutive month, some way short of the BoE's target, however this softness is largely attributable to the recent change in the energy price cap depressing prices.

 

As such, the core inflation measure -- which strips out both food and energy prices -- is the measure that should be more closely watched. Core inflation is expected to have increased by 1.7% YoY as 2019 drew to a close, the 4th straight month that core CPI has increased at this rate.

For sterling, the risks to the CPI number are tilted firmly to the downside, with any signs of sluggishness in inflation set to see markets further price in a BoE rate cut as soon as this month, thus resulting in stiff headwinds for the pound.

Speaking of the BoE, dovish MPC member Michael Saunders is set to make remarks this morning. This will be the first time that Saunders has publicly spoken since dissenting in favour of a 25bps cut at the last 2 policy meetings, hence dovish comments are to be expected as Saunders is likely to make the case for immediately providing additional policy stimulus.

 

Today's Other Data

Elsewhere, today also sees a number of other, second-tier, economic releases:

 

  • This morning sees the release of the latest eurozone industrial production figures, set to show some signs of the ongoing manufacturing slowdown bottoming out, with production expected to have increased by 0.3% MoM.
  • From the US, December's producer price inflation and January's New York state manufacturing reports are due, though neither will result in significant volatility.
  • Meanwhile, in the world of monetary policy, the Fed will release their Beige Book this evening, reporting anecdotal evidence of regional economic conditions. Meanwhile, voting FOMC members Harker and Kaplan are also set to speak.

 

And Finally...

Today marks 5 years to the day since the Swiss National Bank shocked markets by unpegging the franc from the euro -- the so-called 'Francogeddon'. The Swissie had been pegged at a level of 1.20, however, after the SNB's surprise announcement that the peg would be scrapped, the currency strengthened by as much as 20%. The below chart shows how the event unfolded.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP CPI (YoY - Dec) 1.5% 1.5%
9.30am GBP Core CPI (YoY - Dec) 1.7% 1.7%
10.00am EUR Industrial Production (MoM - Nov) 0.3% -0.5%
1.30pm USD PPI (YoY - Dec) 1.3% 1.1%
7.00pm USD Fed Releases Beige Book