Triple selling highlights risks to Trump’s approach

USD: Triple selling a message for Trump

Yesterday, here we covered the theme of the prospect of retaliatory selling of US assets by European entities as a response to the threat by President Trump to invade and take control of Greenland. This we argued was very unlikely but more credible was the prospect of private investors reducing US asset exposure to some degree. The news yesterday that the Danish pension fund Akademikerpension was exiting the US Treasury market certainly added to the speculation of further foreign investor selling. We would still argue this is unlikely to unfold in the manner in which yesterday’s announcement took place. The exit involves USD 100mn worth of UST holdings and is easily doable whereas other investors with more substantial holdings would have greater difficulties exiting with a lack of alternative markets available.

But another announcement like the Danish one can certainly reinforce the negative momentum and feed the speculation of a broader sell-off of US assets. The dollar on a DXY basis fell 0.8% yesterday, which was in fact the largest one-day drop since August when the Fed hinted clearly at the prospect of a rate cut in September. Investors sense that the taking of Greenland could be a step too far and warrants a more serious flight of capital from the US than what took place in April last year. The selling then was fleeting. TIC data revealed net selling of US bonds and equities totalling USD 66.9bn in April but was then followed in May by purchases totalling USD 317bn. The selling in April was the largest since covid, the buying in May was a record.

What was similar yesterday to that post-Liberation Day period was the triple selling of US assets – the dollar sold off, the S&P 500 fell 2.1% and the 10-year UST bond yield jumped 7bps. This year the mid-term elections will take place and if there’s a positive in what is happening it is that it’s self-inflicted and hence President Trump can choose to reverse course. The financial market reaction was what forced a very quick reversal of the Liberation Day tariffs and you could argue in an election year that kind of reversal if we see large market sell-offs is even more likely.

President Trump may be about to rein back the tensions and before leaving for Davos stated that “we’ll work something out” suggesting that some progress might be made in Davos today. Financial market order was also helped by the sharp rebound in JGB prices. The 30-year JGB yield fell 15bps today although that amounts to a reversal of only about half of yesterday’s move and the 30-year yield is still up some 33bps year-to-date. Finance Minister Katayama spoke in Davos today and suggested the government would not finance additional tax cuts through JGB issuance without giving much information on how that could be done.

After such a significant jump in yields, it’s not surprising to see some retracement on these comments but the conviction in the move today is not particularly strong and risks certainly remain skewed to renewed JGB selling. More clarity in fiscal plans will be required while supportive comments from the BoJ on a willingness to support the market if required will also be needed. Yen risks remains skewed to the downside.

BIGGEST ONE-DAY USD SELL OFF SINCE AUGUST LAST YEAR

Source: Bloomberg, Macrobond & MUFG GMR

GBP: CPI as expected following softer jobs data

UK inflation data was released this morning and there were no surprises in the data that revealed a modest pick-up in inflation into year-end. The December YoY rate picked up from 3.2% to 3.4%, 0.1ppt higher than expected. But the core rate (unch at 3.2%) and the services CPI rate (4.5% from 4.4%) were 0.1ppt weaker than expected. Transport was the area providing the biggest upward contribution related to airfares. Alcohol and tobacco was the other big positive contribution. These increases were down to specific factors like the timing of flights around the Christmas and new year period and a recent increase in excise duties. Core services were unchanged at 4.0%.

The inflation data today followed the jobs data yesterday that certainly underlined the continued worsening of the UK labour market. The PAYE employment data revealed a 43k drop in employment in December following a 33k drop in November. The December drop was the largest since covid and will further raise expectations of a continued decline in wage growth. The wage growth data was less compelling but still indicated a gradual softening. In particular, private sector wages, ex-bonus slowed from 3.9% to 3.6% - the weakest growth rate since November 2020.

The inflation data today, while showing some slight increases, is not going to alter the views of the BoE and the data will have little impact on shaping policy rate expectations going forward. But there was limited impact yesterday to the weaker labour market data which was a little more surprising although that may have reflected the upward pressure on yields more generally following the bond market shock in Japan. That lack of reaction though means the market still looks under-priced for BoE rate cuts ahead – the OIS market shows just 6bps of easing by March and despite the pick-up in inflation in today’s data, which was anticipated by the BoE, we see scope for the BoE to cut by then given the disinflation momentum is set to continue as the labour market weakens further. That likely means GBP underperformance ahead, mainly reflected versus the euro.

UK ANNUAL CORE CPI STILL HAS SCOPE TO DECLINE FURTHER OVER THE COMING MONTHS BASED ON 6MTH ANN RATE

Source: Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com