Markets
It’s testament to current market sentiment that Friday’s comments by the ranking number two in Frankfurt, ECB chief economist Lane, barely caught attention whereas weekend comments by ECB governing council member Schnabel are today’s talk of town. The notoriously dovish Lane stuck to the ECB’s December inflation forecasts and view of fading inflation over the policy horizon after transitory factors disappear. Schnabel addressed the risk that higher energy prices could nevertheless warrant a policy reaction. Tackling climate change could come at a more permanent energy cost, she argues, and filter into higher inflation expectations from economic agents and even in a wage/price spiral. Climate measures like carbon taxes or compensation measures add to upside inflation risks. Using elevated energy prices as a reason to accelerate policy normalization rather than sticking to an accommodative policy would mark a complete ECB U-turn. We haven’t arrived at that point yet, but closely monitor the issue. Markets are also thinking it that same direction. Whereas the ECB stressed at its December policy meeting that net asset purchases will be conducted at least until the end of the year and continue to have an open-ended character, markets started adding rate hike bets for end 2022/early 2023 in spite of forward guidance stating a lengthy pause between ending net asset purchases and the rate lift-off. Since the eve of the December 15 ECB meeting, the December 2022 3 month Euribor contract trades at -0.31%, up from -0.365. The yield on the December 2023 contract increased from -0.07% to +0.115%, suggesting a positive ECB deposit rate by end 2023 compared to -0.50% currently. The European swap rate curve bear steepened over that same period with yields rising by 7 bps (2-yr) to 29 bps (30-yr). Real yields move away from rock-bottom levels. Technically, the EU 10y swap rate moved beyond the previous 0.33% recovery high, to currently test 0.4% resistance. That’s 50% retracement on the decline during 2018-2019. A break higher suggests further upward potential towards the 0.6% area.
Today’s intraday market dynamics didn’t really differ from the start of the year. Core bonds remain near/at sell-off lows. US yields add 2.3 bps (2-yr) to 4.5 bps (7-yr) with the belly of the curve underperforming the wings. The US 10-yr yield trades above the previous recovery top (1.8% vs 1.77%) going into this week’s CPÏ print (Wednesday; 7% Y/Y expected) and supply operation. Especially 10y and 30y Note/Bond sales on Wednesday/Thursday will be closely monitored. German yields rise 0.5 bps (2-yr) to 2 bps (30-yr) today in a bear steepening move. The German 10-yr yield has the psychologic 0% mark within reach. 10-yr yield spread changes vs Germany are broadly unchanged with Italy (–3 bps) outperforming in an unwinding move after last week’s syndicated supply. The Kingdom of Spain joins the frontloading efforts by announcing a new 10y benchmark. The deal will normally happen tomorrow. Rising core yields, and especially their real rate component, pull European stock indices up to 1% lower. EUR/USD remains within the established trading range, with the dollar today being the intraday beneficiary. The pair changes hands at 1.1293. EUR/GBP tested the 0.8335 sell-off low, but a break didn’t occur for now. News Headlines
Norwegian inflation sprinted to 5.3% in December, compared to the expected status quo at 5.1% the month before. It’s the highest reading since 2008. Soaring electricity prices explained much of the move. However, the underlying gauge also rose from 1.3% y/y to 1.8% (1.4% expected). The data support the Norges Bank’s case to further normalize monetary policy since it started raising rates in September last year. Back in December and after hiking rates for a second time (to 0.5%), the central bank hinted it would increase policy rates for a third time in March this year. The Norwegian krone weakens slightly vs the euro today though the move is mainly sentiment-driven. EUR/NOK trades north of 10(.05).
