New Week, Same Themes

WHERE WE STAND – New week, same themes, was the general vibe of trade yesterday.

That was certainly true of the UK, where Monday brought another day of selling pressure across the Gilt curve, as 10- and 30-year yields both climbed as much as 6bp apiece, hitting fresh multi-year highs.

This continued pressure came as bearish momentum across DM fixed income curves persisted, but also after the weekend papers saw little by way of comment on the fiscal backdrop from Government sources. The lack of verbal intervention was seemingly taken by market participants as an invitation to embark on a further round of selling, which seems likely to persist into today’s supply, and more importantly tomorrow’s CPI print.

We did, however, hear from PM Starmer during Monday’s session, who reiterated that the Government will “absolutely” stick to its fiscal rules – more than just mealy-mouthed speeches will be needed to steady the ship, however.

Intriguingly, Starmer refused to commit to Rachel Reeves being Chancellor at the time of the next election, despite having already made the same commitment about Foreign Secretary David Lammy. Starmer also noted that Reeves has his “full confidence”, a line eerily similar to that used by football club owners, just before they sack their manager.

I wonder if this is the first sign of Starmer setting Reeves up as a ‘sacrificial lamb’, who will find herself out of a job if further substantial, manifesto-breaching and promise-breaking tax cuts are required in order to restore fiscal headroom. Politically, ditching Reeves could be the most, if not only, palatable option, to wriggle out of the present predicament.

Away from the UK, ‘more of the same’ was also the general theme of proceedings.

Sentiment remained relatively soft, with stocks on both sides of the Atlantic lurching lower, as fallout from Friday’s blowout December US employment report continued. That report, it seems, was too hot for comfort for the equity market, where participants have again – in the short-term at least – focused on the headwinds that a more hawkish monetary policy outlook may present, as opposed to the solid economic backdrop to which the jobs figures pointed.

In many ways, this resilient backdrop should provide continued support to the present solid clip of earnings growth, thereby supporting the bull case over the medium- and long-term. A case which I remain a believer in.

That said, it is perhaps unsurprising that participants have little conviction to add risk at this juncture, with focus instead falling on squaring up positions, and hedging downside risk, ahead of President-elect Trump’s inauguration next Monday. To reiterate, the ‘default’ position for most into the early days of Trump’s second term is to be flat risk, short Treasuries, and long USD.

Clarity on Trump’s initial policy plans is likely to be needed to alter this bias, though expect a barrage of ‘sources’ stories on that front as the week progresses.

That barrage hasn’t, yet, arrived however, with Monday having been a rather quiet day in terms of data- and news-flow. Still, it’s noteworthy that uncertainty over tariffs is not solely impacting markets, but also having a macro effect already, with Chinese exports having risen 10.7% YoY in December, likely as businesses ‘front-run’ potential tariffs being imposed later this month.

Despite the relative calm yesterday, the move in crude continues to catch the eye, with Brent and WTI gaining further ground yesterday, with the latter climbing north of $80bbl once more, touching its highest level since last August.

Tighter supply, by virtue of fresh sanctions on Russia, appears the catalyst here, as participants discount an increasing likelihood that consumers in China and India will be forced to source alternative supplies on the global market. Crude bulls look to have the upper hand, for now, while these consumers remain at ‘panic stations’, though the demand outlook remains rather dour, hence gains could prove short-lived.

In any case, higher crude prices are yet more bad news for the Chancellor, and BoE Governor Bailey, particularly as the GBP continues to slide, thus introducing another upside inflation risk to the UK economy, heightening the chances of ‘stagflation’ embedding itself even further.

LOOK AHEAD – Another quiet data docket awaits today.

The only notable release comes Stateside, in the form of December’s PPI figures. Headline factory gate prices are seen rising 3.5% YoY, 0.5pp higher than in November, though read-across to tomorrow’s CPI print is likely to be limited, and the print shouldn’t move the needle in terms of Fed pricing.

Besides that, a handful of central bank speakers, including Fed voters Schmid and Williams, plus BoE Deputy Governor Breeden, are the only other notable items on the calendar.