Chart of the Day
US inflation expectations continue to rise, with the 5-year/5-year (i.e. for 2026-2030) inflation-linked swap rate jumping by another 8 bp to 2.42% yesterday. Despite all the talk about the risks of unusually high inflation ahead, the 5-yr/5-yr swap is still well below the rates recorded in early 2014. Some think that means there is plenty of room for inflation expectations to keep rising, particularly given the new US administration wants to further loosen fiscal policy. That looks far less likely in the eurozone, where inflation expectations remain much weaker.
The US move above was likely helped by the data, with housing starts and building permits jumping in December to their highest since the Great Recession.
The US Philadelphia Business Activity index also rose in January, although it has lagged behind the national ISM in recent months.
The business surveys have recently remained depressed in the largest eurozone economies.
It was a busy central bank day yesterday, with the ECB, Norges Bank as well as the central banks of South Africa and Turkey all meeting. None changed their policy rates, so Turkey’s remains over 12 pps higher than any of the others.
The CBRT has been kept its policy rate that high to stem the pressure on the lira in 2020. It seems to have worked, with the lira appreciated since late last year - although it is still over 7 per USD.
Although there were no headline moves, markets interpreted the message from the ECB as being more hawkish than they expected, which caused bond yields across the region to rise, although they obviously remain very low.
The US housing data was good news for lumber prices, which rose by almost 7% but remain some way below their earlier high.
One risk to the commodity outlook is the recent turn in credit conditions in China.
Finally, it was a pretty poor day for the cryptos. It will be interesting to see how traders react if it drops back below $30,000.
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