Markets
Spanish inflation served as an eyeopener this morning (details below). Price growth unexpectedly accelerated to 5.8% in January, missing the consensus by a full percentage point. It’s a reminder that we, the ECB or anyone else shouldn’t take easing headline inflation for granted. Core inflation also shot up to 7.5%, highlighting the persistence of soaring prices. Yields on the European continent jumped immediately and maintained most of this gain for the remainder of the day. German rates add between 5.2 and 7.2 bps in an inversion deepener. US rates followed the European course by rallying 1.7-5.5 bps across the curve. ECB rate hike bets rose with money markets now closer in pricing a 3.5% terminal rather than 3.25%. European swap yields advance 5.3 to 6.8 bps, the belly underperforms. Germany, and therefore the eurozone (data due tomorrow), still risks being in a recession with GDP Q4 growth coming in at -0.2% q/q (1.1% y/y) instead of the expected stagnation. But that’s merely a technical and almost irrelevant discussion. Europe’s economic future looks brighter than a few months ago, and to that extent it doesn’t really matter whether the bloc is currently either experiencing or narrowly avoiding a very mild recession. Increased optimism is becoming more apparent in some (soft) indicators, such as the EC’s ESI published today. Economic sentiment continues to bottom out in January, rising to 99.9 (97.0 expected) and up from an upwardly revised 97.1. On a sector basis, optimists in the industry for the first time since September outnumbered the pessimists (1.3). The services sector series (10.7) is nearing the levels seen last summer.
The euro welcomed the additional interest rate support, but the fragile equity risk sentiment caps gains vs the likes of the dollar. EUR/USD went for the 1.09 big figure in a brisk move higher but pared gains afterwards. It is currently trading just south of that level. Since mid-January, EUR/USD is trending sideways. It’ll take the Fed and ECB to decide over its next directional move. That may also be the case for EUR/GPB (0.879). Sterling has been flipflopping around 0.88 in a two big figure range for all of 2023 so far. The Bank of England meets this Thursday. Moves in other currencies are fairly limited. The SEK underperforms peers following an unexpected growth contraction in Q4 (-0.6% q/q vs +0.2% consensus). EUR/SEK (11.28) rises towards the current 2023/multiyear highs. There are some spillovers to the Norwegian krone as well (EUR/NOK 10.81) with a 1.5% drop in oil prices weighing down on the currency too.
News & Views
Belgian inflation increased marginally in January (0.09% M/M) with the headline figure falling from 10.35% Y/Y to 8.05% Y/Y. The big drop is almost solely related to lower energy and natural gas prices which showed a sharp increase in January 2022 and on top a monthly decrease compared to December. Core inflation, which does not take into account price evolutions of energy products and unprocessed food, stands at 8.05% Y/Y in January, up from 7.34% Y/Y in December. Inflation for services has increased to 6.56% Y/Y up from 5.8% Y/Y. Inflation for rents has risen from 4.98% Y/Y to 5.93% Y/Y. Food inflation (including alcoholic beverages) now stands at 15.59% Y/Y compared to 14.53% Y/Y last month. Spanish inflation fell less than expected (-0.5% M/M vs -1.9% M/M) with the Y/Y-gauge unexpectedly ending a 5-month decline (5.8% Y/Y from 5.5% Y/Y). Spanish core inflation rose to a fresh record high of 7.5% Y/Y. Few details are published, but the statistics agency suggests that it was driven by fuel costs (end of subsidy) and by a smaller drop than usual in clothing prices.
The Financial Times reports that the EU is preparing to loosen the rules to support investment into new production facilities in green sectors (including via the creation of tax benefits) in response to the US’s $369bn Inflation Reduction Act. A temporary crisis and transition framework would allow greater aid for more mature technologies and renewable energies (beyond the EU’s current renewable energy laws) to include green hydrogen and biofuels. Brussels also intends to simplify and accelerate approvals for projects of common European interest and will set overall targets for green industrial capacity by 2030. It would also increase the threshold above which the Commission scrutinizes deals under its state aid “block exemption” regime, making it easier for governments to subsidize hydrogen, carbon capture, zero-emission vehicles and energy efficiency measures.
