Markets
The day after. Markets are still digesting the Fed’s determination to kill off high inflation. The rate kickoff is in March and we assume the central bank wants to move fast by hiking at least four times consecutively. This process will soon (June?) be accompanied by a natural roll-off of the balance sheet. Testament to the strong economy chair Powell referred to justifying the Fed’s tough approach, US Q4 GDP growth came in at 6.9% q/q annualized, topping a 5.5% consensus. A huge inventory build-up added 4.9 percentage points to the figure. It’s a consequence of companies restocking after burning through their inventories amid supply shortages to keep up with high demand. Personal consumption added a solid 2.25 ppt. Meanwhile, investors keep raising bets for a bigger than usual (>25 bps) hike on March 16 (30 bps priced in). Short-term US yields advance further today, adding almost 5 bps in the 2y-maturity before paring some gains in early US dealings. The long end of the curve rebounds after selling off yesterday, with yields declining 5 to 6.9 bps in the 10y and 30y. Aggressive Fed repositioning spills over into Europe with money markets pricing in almost 20 bps of rate hikes by end this year. Investors assume the ECB is unable to keep looking the other way after the Fed put its cards on the table. We fear they might be in for a disappointment next week. For now however, it helps the German yield curve bear flatten. Changes range from 3.3 bps (2y) over 4.1 bps (5y) to 2.3 bps (10y). European swap yields rise in similar fashion. Peripheral yields narrow several bps. Italy (-5 bps) and Greece (-4 bps) outperform.
European equity markets gapped lower following WS’s intraday setback but recovered during the day to trade about 0.6% higher (EuroStoxx50). Active dip-buyers push indices in the US >1% higher. Currency markets, the euro in particular, have long been and still are reluctant to anticipate central bank action as long as there’s no clear commitment to do so. That’s why the euro today fails to bank on euro area money markets piling up pressure on the ECB while the USD builds on yesterday’s Fed-driven gains. The trade-weighted greenback jumps beyond resistance of 96.94 (previous recovery high) to trade at 97.23 currently. It paves the way towards 97.72 (61.8% retr. of the 03/20 high – 01/21 low, June 2020 correction high) from a technical point of view. EUR/USD broke parallel support by the November 21 low (1.1186) and immediately slipped below next, intermediate, support at 1.1163 to trade at 1.1152. UK yields also advance several bps across the curve in the wake of the Fed. The short end underperforms as a March BoE rate hike is almost considered a done deal (95% chance discounted). Sterling is not flourishing per se but it does have the upper hand vs the euro with technical breaks in EUR/USD obviously not helping. EUR/GBP eases from 0.835 to 0.833. The pound is no match for the dollar. Cable (GBP/USD) tests the 1.34 big figure (1.3378).
News Headlines
The Hungarian central bank (MNB) followed up on this week’s 50 bps rate hike of the base rate (2.4% to 2.9%) with a 30 bps hike of the 1-week deposit rate (4% to 4.3%). The MNB clearly stated its intention to close the gap between the two in coming months and reinstall its base rate as the prime rate. It’s the most effective tool to tackle inflationary pressures while the deposit rate is better suited to stem financial stability issues and help stabilize the currency. The forint enjoyed the MNB boost today. In combination with rebounding risk sentiment, EUR/HUF declines from 360 towards 357. The Hungarian unemployment rate stabilized at expected at 3.7% in December, the lowest level since March 2020.
The fourth attempt to elect a new Italian president failed as well even if the threshold dropped from a two-thirds to a simple majority. The right-wing block abstained while the centre-left one cast blank ballots. Italian political leaders agreed to buy time in their search of an alternative candidate to current PM Draghi. They fear political instability if Draghi gets “promoted” from PM to president.
