Markets
When Germany announced a delay in its January CPI publication, Eurostat used an own estimate to fill in the gap for the euro area wide figure, published early February. When the biggest economy released the actual number, statistical eggheads soon found out that Eurostat’s guesstimate was too low. They turned out to be correct. Final EMU HICP came in at 8.6% y/y compared to 8.5% in the preliminary release. Core inflation was also revised upwards, from 5.2% to 5.3%. A marginal adjustment indeed, but nevertheless one with psychological implications because the 0.1 ppt revision made the difference between core inflation stabilizing in y/y terms (December reading stood at 5.2% too) or further increasing to a new record high. The US eco calendar contained second GDP and price deflator readings for Q4 last year. The former came in lower (2.7% vs 2.9% q/q annualized) but the latter was revised quite a bit higher (core PCE from 3.9% to 4.3% q/q). Combined with slightly lower-than-expected weekly jobless claims, running sub 200k for a sixth month straight, it supported an ongoing UST yield rise. Rates at some point rose between 2.3 and 4.7 bps but pared most gains as US dealings got going. European rate dynamics were similar to those in the US. German bonds slightly outperform with declines of less than 1 bp. The very long end (30y, -3.5 bps) is tainted by today’s syndicated tap. UK gilts underperform once again. It follows a hawkish speech from Bank of England’s Catherine Mann. Having Tuesday’s surprise PMI recovery at the back of her mind, she said monetary policy has not been aggressive enough. Further tightening is needed, citing risks for increasingly persistent inflation. Mann also referred to financial conditions as being looser than what is needed and is worried that this may extend the inflation problem well into next year. UK yields advance 4.4-5.4 bps through the curve with the belly slightly underperforming the wings. Money markets now consider a terminal rate of 4.75% as more likely than the 4.5%.
Mann’s speech and the resulting UK yield surge doesn’t help sterling though, nor does the upbeat risk sentiment (Euro Stoxx 50: +0.7%). EUR/GBP ekes out a tiny gain to hold north of 0.88. Moves in most other cross rates are close to non-existent too. EUR/USD tested intermediate support at 1.0595 but steers clear from a break lower. DXY stands pat at 104.51. The yen is losing some ground (USD/JPY tentatively surpasses 135). Weighing on the currency is the rise in core bond yields and some nervousness, perhaps, in the run-up to BoJ governor-elect Ueda’s confirmation hearing tomorrow. The BoJ’s ultra-low rate policy still serves as some kind of a global anchor point. Any clues for abandoning this stance somewhere in the (near) future will definitely be picked up by markets, inside and outside Japan.
News & Views
The Turkish central bank (CBRT) cut its policy rate by 50 bps, from 9% to 8.5%, indicating that the current monetary policy stance is adequate to support the necessary recovery in the aftermath of the earthquake. It is generally assumed though that governor Kavcioglu and co might (be pushed into) slash(ing) policy rates further ahead of the May general election. The Committee vows that it will prioritize the creation of supportive financial conditions in order to minimize the effects of the disaster and support the necessary recovery even as inflation was still running at 57.68% Y/Y in January, more than tenfold the CBRT’s inflation target. In order to mitigate the impact on the currency, the central bank will stick with and extend its Liraization Strategy. The Turkish lira isn’t impacted by today’s decision. EUR/TRY continues trading above the 20-mark after testing the all-time TRY-low at 20.75 earlier this month.
The ECB published its financial statements for 2022. The central bank’s profit fell to zero (from €192mn in 2021), implying no profit distribution to national central banks. The result takes into account a release of €1.6bn from the provision for financial risks to cover losses incurred during the year, shrinking the reserves to €6.6bn. Writedowns, meanwhile, surged to €1.8bn (only €0.13bn in 2021), “mainly stemming from unrealized price losses on securities held in the own funds and US dollar portfolios owing to increased bond yields”. The size of the consolidated balance sheet of the Eurosystem declined from €8564bn to €7956bn, mainly due to early repayments of TLTRO’s, which were partially offset by higher holdings of monetary policy securities as a result of purchases under the APP (+€130bn to €3254bn) and the PEPP (+€100bn to €1681bn).
