Markets
Core bond yields initially extended gains after a sharp move on yesterday’s stronger-than-expected PMIs on either side of both the Atlantic and the Canal. German Bunds underperformed US Treasuries this time. French ECB Villeroy was acting spoilsport for the day though. He backtracked on his comments made end last week. Implicitly referring to an ECB rate of 4% as he saw the tightening cycle ending in September, he added today that markets overreacted a little and that the central bank “in no way” is obliged to hike at every meeting in the runup to it. His intervention called off the early 2-4 bps rise in European rates. The German yield curve turns slightly less inverse with yields declining 1.8 bps in the 2-5y segment but with the long end still adding a few bps. US yields eased 3.6 bps (30y) to 5.6 bps (2y). Fed’s Bullard repeated his call for a 5.25-5.5% Fed policy rate and getting there ASAP but sounded optimistic about “beating inflation in 2023” citing the ongoing disinflationary process. It triggered some additional UST gains, coming from the central bank’s most outspoken hawk. UK gilts notably underperform. After Tuesday’s sharp (services) PMI rebound markets are reconsidering their (too pessimistic?) views on the economy and monetary policy. Curve inversion deepens with yield changes ranging between +1.2 bps (30y) to +4 bps (2y).
Catching up with Wall Street yesterday, European stocks deepened opening losses to a little over 1% in the Euro Stoxx 50 before bottoming early afternoon. The timing coincided with Bullard’s not-so-hawkish interpreted speech but the technicals helped too. The lower bound of the upward trading range was tested multiple times but held tight, triggering a countermove instead. Current losses amount to 0.3% only. US indices open with small gains. Gradually improving sentiment lifted EUR/USD from the intraday lows around 1.062. The pair is still slightly down on a net daily basis though (around 1.064). The trade-weighted DXY struggles to surpass resistance at 104.11 (23.6% recovery on the Sep-Feb downleg). Sterling’s intraday fall and rise corelated with risk sentiment. EUR/GBP’s attempt to recoup some of yesterday’s almost 100 point drop ended in tears. The pair is currently trading unchanged just below 0.88. News & Views
Germany reported a final CPI figure for January with the domestic CPI index confirmed at 1.0% M/M and 8.7% Y/Y. However, a revision introducing a new base year 2020 resulted in the figure of December 2022 and November 2022 being downgraded to 8.1% and 8.8% respectively from 8.6% and 10.0% before the revision. In this respect, the Federal Statistical Office concluded that ‘the price increase thus accelerated at the beginning of the year’. According to the head of the Federal Statistical Office it is ‘observing price rises for many goods and to an increasing degree also for services. Households paid higher prices in particular for energy and also food prices in January’.
The government of South Africa today announced its budget for fiscal year 2023. In the economic projection supporting the budget, the government sees growth slowing down to 0.9% this year from 2.5% in 2022. Inflation is expected to ease to 5.3% from 6.9%. The 2022/2023 budget deficit is expected to come out at 4.2% of GDP, better than the October forecast of 4.9%. The budget deficit is expected to gradually decline further to 3.2% in 2025/2026. The government also announced it will provide ZAR 254 bn in debt relief for the power utility Eskom. Part of the debt relief will be funded via the budget while ZAR 118 bn will be additional borrowing. Amongst others, this will raise gross debt to 73.6 % of GDP in 2025/26 compared to 71.1% expected for current fiscal year. The rand initially gained modestly after the budget statement, but at USD/ZAR 18.22 it returned most of its intraday gains. The rand recently lost ground, partially due to uncertainty on the economic impact from ever growing power blackouts.
According to the monthly business survey of the National Bank of Belgium, business sentiment in the country improved slightly in February. The NBB indicated that the situation varies depending on the sector. Business climate improved in the manufacturing (-14.8 from -16.7) and building industries (-5.8 from -6.6), but deteriorated in the business-related services (-7.2 from -6.6) and, above all, in trade (-24.2 from -14.2). The overall synthetic curve improved from -13.5 in January to -12.8 this month.
