MNI ASIA OPEN - Euro Inflation At Record Levels Ahead of ECB Meeting

NEWS

US/RUSSIA (CNN): The White House says it will no longer describe a potential Russian invasion of Ukraine as "imminent," suggesting the word sent an unintended message when officials used it last week. "I used that once. I think others have used that once. And then we stopped using it because I think it sent a message that we weren't intending to send, which was that we knew (Russian) President (Vladimir) Putin had made a decision," press secretary Jen Psaki said during a briefing Wednesday.

US/RUSSIA (CNN): President Joe Biden has formally approved the deployment of 3,000 US troops to Poland, Germany and Romania, the Pentagon announced Wednesday, in a move to bolster NATO countries in Eastern Europe with tens of thousands of Russian troops amassed along Ukraine's border. The deployments to Eastern Europe, which were first reported by CNN, are a show of support to NATO allies feeling threatened by Russia's military moves near Ukraine and the threat of an invasion, US officials said.

US (MNI): The U.S. Treasury said Wednesday it would cut its coupon issuance across all maturities in the coming quarter, with the largest cuts coming in the 7-year and 20-year maturities. It will issue USD110 billion of securities at next week's quarterly refunding, down from the prior quarter's USD120 billion and raising USD55.2 billion in new cash. Officials say they plan to sell USD50 billion in 3-year notes on Feb. 8, USD37 billion in 10-year notes on Feb. 9, and USD23 billion in 30-year bonds on Feb. 10.

FED (MNI): The Omicron variant of Covid is likely to prolong the record surge in U.S. inflation this year, with the headline PCE measure likely to end 2022 several tenths of a percent higher than forecast by the FOMC, Federal Reserve Bank of St. Louis research director Carlos Garriga said in an interview.

CANADA (MNI): Canada's opposition Conservative Party voted Wednesday to remove Erin O'Toole as leader after a revolt by lawmakers blaming him for watering down the party's principles and losing last September's election to Justin Trudeau's Liberals. Conservative members of Parliament voted 73-45 to remove O'Toole according to a media statement from National Conservative Caucus Chair Scott Reid, which didn't address the process for finding an interim leader or a permanent replacement.

ECB (MNI): A subtle shift by European Central Bank policymakers towards a less dovish line on inflation raises the chances of a further reduction in the pace of bond purchases from as early as mid-year, Eurosystem sources said, stressing that the overall tone of policy remains highly accommodative and rate rises are very unlikely before next year. With inflation reaching 5.1% in January, officials remain sceptical that the eurozone will see a self-reinforcing price cycle fed by higher wages, and sources told MNI that even higher March forecasts were unlikely to prompt any adjustment to policy before June.

ECB (MNI): European Central Bank President Christine Lagarde is likely to push back against market expectations for a 2022 rate hike after Thursday's meeting despite a surge in inflation, but will stress that policymakers are playing close attention to incoming data and will be flexible if necessary.

JAPAN (MNI): The Bank of Japan should not "frantically" curb 10-year Japanese Government Bond (JGB) yields to avoid a weaker yen and instead fine tune policy ahead of expected financial market volatility this year caused by likely Fed rate hikes, a former central bank executive director told MNI. Changes to easy policy should be measured, said Hideo Hayakawa, also former BOJ chief economist and now senior fellow at the Tokyo Foundation for Policy Research.

DATA

EUROPE (MNI): Eurozone inflation blew through expectations in January, taking the annual rate to a new euro-era high rate of 5.1% y/y, data released by Eurostat on Wednesday showed. On the month, prices rose 0.3% over December. Analysts had expected a retreat to 4.5% from 5.0% in December. Energy prices continued to distort the inflation reading, rising by 6.0% between December and January for a 28.6% surge over the same period of last year. Excluding food, energy, alcohol and tobacco, core inflation declined by 0.8% in January, taking the annual rate down to 2.3%, the smallest increase since October, from 2.6% in December.

CANADA (MNI): Canadian building permits rose a record 26% to CAD126.5 billion last year led by higher labor and material costs and a 42% jump in single-family dwellings, boosting the argument for the central bank to begin raising interest rates soon. The year ended with a record CAD33.1 billion worth of permits in the fourth-quarter, a 10% gain, Statistics Canada said Wednesday. Permits fell 1.9% on a monthly basis in December, when omicron took hold.

FOREX: USD Index Extends Decline, Eroding Post-FOMC Gains

• Greenback weakness extended on Wednesday as the US Dollar Index registered a third straight session of declines, eroding the entirety of last week’s post-FOMC advance. While not prompting any extension of the moves, US ADP underwhelmed, missing expectations by nearly half-a-million jobs.
• Despite the overall dollar retreat, a brief bout of equity weakness from the highs kept price action in G10 FX muted throughout the US trading session. On the day, GBP, SEK and NOK led gains, whereas NZD (Unch) was the clear relative underperformer.
• EURUSD was underpinned by notably stronger CPI flash estimates and returns to December’s familiar territory around the 1.1300 mark ahead of tomorrow’s ECB decision.
• With the European central bank’s baseline assumption facing increased pressure the ECB could opt to retain some optionality, at Thursday’s meeting, by stressing that inflation forecasts carry a high degree of uncertainty and that there are upside risks to inflation (perhaps citing the risk of persistent energy price pressures).
• Bank of England also in focus tomorrow, where analysts appear unanimous in expecting a 25bp hike. GBPUSD has further recovered off its recent low of 1.3358 on Jan 27 and has topped resistance at 1.3525, Jan 26 high. A continuation higher would suggest scope for a climb towards 1.3662 next, the Jan 20 high.
• Looking at EURGBP, the broader trend remains down, and a resumption of weakness would open 0.8282/77, the Feb'20 and Dec'19 lows and the multi-year range base at 0.8300.
• After the major European central bank decisions, markets will await US ISM Services PMI data, before Friday’s US Non-Farm payroll takes centre stage.

US TSYS: Bull Flattening Amongst Large Swings

• Treasuries have bull flattened on a day of whipsawing following a large ADP miss, the Treasury Refunding announcement and geopolitical swings.
• ADP was almost 500k below consensus in January and further dampened expectations ahead of payrolls on Fri. Even though the initial reaction was largely unwound, it appeared to set the stage for the subsequent rally after Treasury Refunding that was largely but not completely as expected along with the US announcing the deployment of troops to Eastern Europe.
• 2Y yields are -0.8bps at 1.158%, 5Y -1.6bps at 1.601%, 10Y -1.8bps at 1.770% and 30Y -1.2bps at 2.097%. Lower breakeven inflation had been largely behind earlier rallies but has since largely reversed.
• TYH2 stands towards the middle of the session’s range at 128-03 having earlier got close to testing resistance of 128-11+ (20-day EMA). Volumes remain low, approximately 80% of the average for the time of day.
• Important data releases tomorrow with ULC/productivity for Q4 along with ISM Services for Jan before Friday’s payrolls.