Markets
First ECB governors hit the wires one day after raising policy rates by another 50 bps to 2.5% (deposit rate). ECB Vasle kept close to yesterday’s statement, committing to a 50 bps rate hike in March and vowing to keep policy restrictive. ECB Simkus was somewhat more detailed, warning that core inflation hasn’t peaked yet. Monetary policy is only now becoming mildly restrictive. A rate cut later this year – something markets start believing in – is not very likely. ECB Kazimir warned that a March rate hike won’t be the last and that rates will remain at an eventual peak level for some time to come. He stresses that the fight against inflation is far from won. ECB Muller warned that core inflation is a cause for concern and that the expected economic slowdown may not ease inflation.
US payrolls were… well… Find the adverb yourself: 517k vs 188k expected plus an upward revision of the previous two month’s numbers by 71k. The unemployment rate fell to 3.4%, matching the lowest level since 1968 even as the participation rate rose to 62.4% (matching the highest level since March 2020). Average hourly earnings rose as expected by 0.3% M/M and by 4.4% Y/Y with the previous numbers upgraded to 0.4% M/M and 4.8% Y/Y. Payrolls wrongfooted stubborn markets who doubted central bank inflation commitment. The US yield curve turns less inverse with yields rising by 7.2 bps (30-yr) to 13.6 bps (2-yr). German Bunds yields follow the move (they actually were already rising throughout the day backed by ECB comments) with yields rising by 6.5 bps (2-yr) to 12.2 bps (30-yr). The short term interest rate differential playing in the advantage of the dollar pulls EUR/USD further away from the 1.10-level touched briefly in the aftermath of the FOMC meeting. EUR/USD currently trades around 1.0850. US equities were already bound for a weaker opening following disappointing earnings by three big tech names (Apple, Amazon, Alphabet). Opening losses eventually amount up to 1.3% for the Nasdaq. European stocks cede around 0.7% at the moment. EUR/GBP extends its move beyond 0.89 with dovish comments by chief economist Pill at play as well. He signaled that the end is near for the interest rate tightening spree, stressing the importance of keeping the balance between doing enough to kill inflation but not the economy. Pill added that markets are correctly interpreting the central bank’s guidance. UK money markets currently discount a 4.25% terminal rate and have priced in a first rate cut by Q4. UK Gilt yields are only up to 5 bps higher today in the post-payrolls move.
News & Views
The ECB’s quarterly Survey of Professional Forecasters was released today. Longer-term (> 2025) inflation expectations stand at 2.1%, marginally down from the 2.2% in the previous survey. Respondents revised up their 2023 forecast to 5.9%, reflecting stronger-than-expected indirect effects of energy price developments and wage growth. For 2024 and 2025 price growth is seen at 2.7% (up from 2.4%) and 2.1%. Core inflation over that same horizon could hit 4.4%, 2.8% and 2.3% with 2% penciled in for the longer term. GDP forecasts were broadly unchanged, with a minor upgrade to this year (0.2%, + 0.1ppt) but a slightly lower growth seen for the next (1.4%, – 0.2 ppts). The first estimate for 2025 stands at 1.7%. The unemployment rate is seen ticking higher to 7% this year before easing to 6.9% and 6.7% in the two years thereafter.
The United Nation’s food price index fell for a tenth month straight in January, from 132.24 to 131.16, the lowest level since September 2021. In March 2022, shortly after the Russian invasion, the index shot up to a record high of 159.71. The drop last month was driven by vegetable oils (palm, soy, sunflower seed and rapeseed oils), dairy (butter and milk powders) and sugar. In general, a good harvest & favourable weather (for sugar) and subdued import demand (palm oil and dairy) combined and ample export supplies (rapeseed oil) were at the basis for price declines. The cereal and meat index remained largely stable. A rise in maize and rise prices offset a decline in barley and wheat in the former category . In the meat subindex, lower world prices of poultry and pig meats hung in the balance with rising ovine meat prices.
