Markets
Risk aversion this week for the first time really translated in a safe haven bid towards core bonds. Markets decided to take the foot somewhat off the throttle with regards to the early 2022 aggressive repositioning towards fast and bold tightening cycles. It’s not that they completely retrace on their steps, on the contrary. However, especially in Europe the timing of the next ECB meeting comes at an awkward time. The ECB remains in a tough catch-22 position as the Ukrainian conflict aggravates an already worsening inflation problem. Tomorrow, we’ll see another record EMU CPI figure for February (5.6% Y/Y consensus from 5.1% in January). National data beat consensus in France (4.1% Y/Y), Spain (7.5% Y/Y), Belgium (8.04% Y/Y) and today Italy (6.2% Y/Y) and Germany (5.5% Y/Y). On the one hand, the deteriorating inflation situation warrants a continuation of the ECB’s strategic policy U-turn which Lagarde started verbally early February. Back then, she acknowledged upside inflation risks while no longer ruling out the possibility of a 2022 rate hike. On the other hand, it might make sense to delay the official U-turn until April of June for once dust settles in Ukraine. It would still keep the ECB on track to end net asset purchases by the end of Q3 as some ECB governors suggested to enable a Q4 rate hike. Simultaneously, the ECB avoids in the short run to add another layer of uncertainty over already fragile and volatile markets. The jury is still out, but the interest rate action of the past two days at least opens the possibility for some delay. European swap yields since last Friday lost 12 bps (20-yr) to 24 bps (5-yr). Both the EU 2y, 5y and 10y swap rates lost first support at respectively 0.1%, 0.5% and 0.77%. German yields decline by 23 bps (10-yr) to 33 bps (5-yr) over that same time period. The 3-month forward Euribor curve now discounts an end of 2022 rate of -0.15%, down from +0.02% with the end of 2023 market prognosis declining from 0.68% to 0.49%.
The daily recap furthermore shows new losses for European stock markets (2%), rising commodity prices (eg Brent crude > $104/b) and a slightly firmer dollar. EUR/USD relatively easily holds above the important 1.1106/21 support zone. Central-European currencies remain underperformers. EUR/HUF spiked from 370 to new record high of 380 before retracing to 375 after the central bank showed readiness to intervene to ensure stability. EUR/PLN in a similar move spiked to 4.8 before returning lower after MPC Sura said that the NBP would support PLN strengthening. EUR/CZK spiked to 25.50 with the CNB noting that a weaker koruna boosts inflation risks. News Headlines
The reference contract for Wheat on the Chicago Board of trade today jumped about 5.0% to the highest level since March 2008 as investors fear that the conflict between Russia and Ukraine will cause severe and prolonged disruptions in the supplies of the commodity due to the conflict in the region. The disruptions might take the form of a halt of shipments from Ukraine ports over the inability to finish/finance deals with parties in the two countries. The contract trades about 27% higher compared to the start of the year. The war might also complicate planting of crops for the likes of Corn. Corn futures also trade at the highest level since July last year, recording a gain of about 20% for this year.
Growth in Canada in Q4 accelerated from an annualized rate of 5.5% to 6.7% (1.6% Q/Q) according to data published by statistics Canada today. For the 2021 as a whole, real growth posted a strong 4.6% growth after declining 5.2% due to the pandemic in 2020. In Q4, gross fixed capital formation was an important driver for growth (1.9%), both due to residential and non-residential structures. Inventory building also added substantially to growth. Household consumption only rose a modest 0.2% Q/Q. The Bank of Canada will hold a regular policy meeting tomorrow. It is expected to start a rate hike cycle with a 0.25bps hike to 0.50% as the economy is eliminating spare capacity. The loonie today gains a few ticks to trade at USD/CAD 1.267.
