Markets
The European Commission’s Winter 2022 economic forecasts were today’s appetizer in the run-up to January US inflation numbers. The EC updated the 2021 growth figure to 5.3%, triggering mechanical revisions to the 2022 (4% from 4.3%) and a lesser extent 2023 (2.7% from 2.4%) predictions compared to the Autumn 2021 release. The balance of risks to the growth outlook is broadly even. The EC shifted its inflation path significantly higher: 2.6%-3.5%-1.7% for the 2021-2023 period, coming from 2.4%-2.2%-1.4%. The inflation projections are subject to upside risks if cost pressures are passed on from producer to consumer prices to a larger extent, increasing the likelihood of strong second-round effects. Risks to the growth and inflation outlook are aggravated by geopolitical tensions in Eastern Europe. Inflation forecasts probably remain on the lower side of the spectrum. The ECB in December projected 3.2% for 2022 and 1.8% for 2023 and last week labelled these as outdated. An internal debate is also ongoing about the accuracy of the inflation model given last year’s continuous underestimation of both inflation peak and period over which inflation would exceed the ECB’s 2% inflation target.
US inflation again beat forecasts, rising by 0.6% M/M for both headline and core inflation to 7.5% Y/Y and 6% Y/Y respectively. The price rise was broad-based with heavy-weight categories like housing (5.7% Y/Y), food & beverages (6.7% Y/Y) and transport (20.8% Y/Y) showing significant increases. The strong underlying momentum suggests that this isn’t the headline inflation peak yet (because of higher petrol prices in February). In spite of all downplaying efforts by Federal Reserve officials off late, the multi-decade high inflation print strengthens market conviction that the Fed’s rate lift-off will be a 50 bps one. Selling resumes in US Treasuries, bear flattening the curve. US yields add 10.7 bps (2-yr) to 3.1 bps (30-yr). The US 10-yr yield was a whisker away from piercing above the psychological 2% mark for the first time since July 2019. German Bunds followed US Treasuries lower though the curve steepened, adding up to 4 bps in the 5-yr to 10-yr bucket. The US dollar profits from the beneficial relative yield dynamics with EUR/USD sliding back below the 1.14-handle for the first time since the ECB pivot. USD-gains could have been bigger though. USD/JPY tests the cycle and multi-year high at 116.35. The trade-weighted dollar tries to regain the 96-handle. US stocks sell-off in lockstep with bonds (-1.5%).
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The Swedish Riksbank (RB) left the policy rate unchanged at 0%. It didn’t signal any imminent recalibration of its accommodative policy stance. The RB wants to keep the holdings of its asset portfolio to remain approximately unchanged in 2022 and before decreasing them gradually. Three governors preferred a faster reduction of asset purchases. The Riksbank expects a first rate increase only in H2 2024. Swedish CPIF inflation printed at 4.1% in December but this is entirely explained by electricity and fuel prices. Inflation should drop to just over 1% end 2022 and return to 2% mid next year. Inflation excluding energy prices is holding close to 2%. The risk of too low inflation has decreased but it still remains. The Krona lost modest ground to currently trade in the EUR/SEK 10.47 area.
The ECB announced that it won’t extend the capital and leverage relief for banks which was put in place in 2020 and 2021 in order to help them to continue lending to households and business. In this respect the ECB confirmed ‘the initially envisaged timeline for a return to a normal supervision of banks capital adequacy and leverage’. In concreto, banks are again expected to operate above the Pilar 2 guidance from January 2023. Banks also will have to reinclude central bank exposure in the leverage ratio from April 01 2022. The ECB assessed that banks, even considering the uncertainty regarding the impact of the pandemic, have ample headroom above their capital requirements and above the leverage ratio requirement. End of September 2021 the aggregate Common Equity Tier 1 ratio of banks under direct ECB supervision stood at 15.47%. Their aggregate leverage ratio stood at 5.88%.
