Markets
Kazaks from Latvia and Nagel from Germany yesterday, Wunsch (Belgium) and de Guindos (Spain) today. ECB hawks were sent to do the heavy lifting, ie prepare financial markets for imminent policy normalization. Before the European open, Wunsch said that policy rates could turn positive this year. ECB vice-governor de Guindos shortly after made the case for starting the upward rate cycle already in July. They both spoke in the conditional form (unless “really bad news”, “depending on the data”) but markets see right through this politically correct talk. The transcript of Lagarde’s speech at the IMF spring meetings tonight held a more balanced tone. The key takeaway though is that she sees further inflation pressure from supply bottlenecks. This implies an almost certain upgrade to the inflation outlook in the June forecasts. Certainly keep an eye at the panel discussion later tonight for some fireside comments as well as her keynote speech at the renowned Peterson Institute for International Economics tomorrow. German/European 2-y yields rise 9-12 bps, erasing in one day the minor correction lower of the past few days. The long end outperforms, adding less than 3 bps. A slightly weaker final EMU HICP outcome for March (headline 7.4% and core 2.9% instead of the preliminary 7.5% and 3%) only temporarily cut the upward intraday momentum short, thanks to an “unknown ECB source”. The source told financial media company Econostream that some policymakers including Holzmann will push for a 50 bps deposit rate hike accompanied by a 25 bps hike in the refinancing rate (now 0%) to narrow the corridor in one move. An ECB this bold would only fit the general central bank trend. US bond yields add 4.4-7 bps in a bear flattener. The euro benefited from increasingly concrete interest rate support. EUR/USD jumped beyond 1.09 but fell short of testing first intermediate resistance around 1.0954. The currency pair is currently trading in the high 1.08 area, up from 1.085. EUR/GBP extended gains beyond 0.83 but is off intraday highs. Bank of England’s Catherine Mann signaled more tightening is in the pipeline, citing evidence of inflation spreading to price strategies. UK Gilt yields surged more than 10 bps at the short end, shrugging off the idea of a cautious tightening to preserve fading economic growth. The BoE’s governor, Bailey, is due to speak later today. Low-yielding and safe haven currencies including the yen and Swiss franc face a double whammy having their aforementioned features playing out against them (stocks up 1.4% in Europe and 1.6% for the Nasdaq on WS). EUR/JPY tested 140 for the first time since 2015, EUR/CHF rose to well above 1.03(4).
News Headlines
Quite some Polish eco data were published today. Most data surprised on the upside and the global picture still gives a nihil obstat for the National bank of Poland to continue its tightening cycle. Consumer confidence improved slightly from -39.0 to -37.2, but stays near the post-corona-low. Indictors on current conditions remained very weak or even deteriorated further, but series measuring expectations for the 12 months ahead improved. Industrial output jumped a bigger than expected 18.2% M/M and 17.3% Y/Y, with all subsectors contributing to growth. March PPI inflation accelerated further to 4.9% M/M and 20.0% Y/Y (from 16.1% ), suggesting ongoing pipeline inflation. Labour market data were strong too. Employment rose 0.2% M/M and 2.4% Y/Y (from 2.2%). Average gross wages also beat market expectations rising 7.2% M/M and 12.4% Y/Y (from 11.7% Y/Y), an indication that inflationary pressures are further filtering through into the broader economy. The PLN 2-y swap rate rose 11 bps to 6.62%, with most of the move occurring after the data release. The zloty strengthened from a level of EUR/PLN 4.28+ to currently 4.2525, but most of this move already took place before the data release.
Belgian consumer confidence in April recovered somewhat after dropping sharply in March, rising from -16 to -14. Belgium consumers were less pessimistic on the economic situation and in their expectations regarding their personal financial situation even as it stays near an all-time low. Consumers also intend to save slightly more. On the negative side, consumers fear a further rise in unemployment over the next 12 months.
