Rising Interest Rate Support Further Propelled the Euro

Markets

Yesterday, first German regional CPI’s (North Rhine Westphalia) and Spanish headline CPI declining from 6.0% to 3.1% (HICP) suggested EMU March inflation slowed faster than expected. European yields nosedived up to 10 bps+ at the open. Maybe the ECB had more room keep a wait-and-see approach than indicated until now. However, the story wasn’t that straightforward. Markets even found themselves wrongfooted. Other regional German CPI release showed a monthly rise of up to 1.0%. German HICP inflation in the end printed at 1.1% M/M, resulting in a higher than expected 7.8% Y/Y (from 9.3%). The monthly dynamics indicate inflation stickiness to persist. Spanish core CPI easing only marginally from 7.6% to 7.5% also put the positive headline surprise in perspective. EMU interest rates staged an impressive intraday reversal. Bund yields even finished the day between 9.5 bps (2.-y) and 1.3 bps (30-y) higher. Both the 2-y and 10-y yield arrived at first resistance near 2.75% and 2.40% respectively. US yield moves again were far less outspoken. US jobless claims stayed just below 200k, but that didn’t change the dynamics. The US curve inverted slightly further (2-y +2 bps; 30-y -2.5 bps). Fed members Collins, Kashkari and Barkin in one way or another acknowledged inflationary risks, but took a balance approach as they ponder the impact of recent turmoil on lending. Equity markets weren’t disturbed by the intraday yields rebound. The Euro Stoxx 50 gained 1.28% and is less than 1.0% from the early March top. US indices gained between 0.43% (Dow) and 0.73% (Nasdaq). Rising interest rate support further propelled the euro. EUR/USD came within reach of the 1.093 top (close 1.0905). The decline of the yen slowed (USD/JPY closed 132.70). EUR/GBP again finished near the 0.88 pivot.

Contrary to yesterday, Asian equities this morning join yesterday’s positive momentum from WS gaining up to 1.0%. China official PMI’s were strong (composite 57 from 56.4), indicating the recovery is gaining traction, especially in the services sector (58.2). Japanese activity data (Feb retail sales, production) also printed strong. Tokyo CPI (ex-fresh food and energy) rose from 3.1% to 3.4%, for now with little impact on the 10-y yield (0.325%). US Treasuries and the dollar are trading little changed this morning. Later today, the calendar is well filled with the EMU flash CPI (headline expected 1.1% M/M and 7.10% Y/Y from 8.50%, core seen rising from 5.6%, to 5.7%). In the US, core PCE deflator (February) probably will make little progress toward the 2.0% target (0.4% M/M and 4.70%Y/Y). Also keep and eye at the Chicago PMI. Inflation data might confirm that there still work to be done for a sustained return to 2.0%, but after this week’s rebound in yields, a meaningful upward surprise is probably needed to extend the move (Cf resistance levels in German yields supra). A constructive risk sentiment, might keep the dollar in the defensive. EUR/USD breaking beyond 1.093 might open the way for a revisit of the 1.1033 YTD top.

News Headlines

South Africa’s central bank jacked up rates yesterday by 50 bps to 7.75%, double the 25 bps move expected by analysts. The rationale behind the larger-than-anticipated hike was another upward revision to inflation, which is now seen at 6% this year, from 5.4% before. Average price increases for 2024 and 2025 are seen at 4.9% (+0.1 ppt) and 4.5% (unch.). Core inflation should ease from 5.1% in 2023 to 4.5% in 2025. Risks remain tilted to the upside, SARB governor Kganyago said. The growth picture doesn’t look too bright, due to the largescale power outages and delivered monetary tightening. GDP in 2023 could come in at a mere 0.2% before picking up to 1% and 1.1% in the years thereafter. For this reason markets start pricing in rate cuts from November already. The South African rand yesterday nevertheless profited, appreciating from USD/ZAR  18.10 to 17.82, the strongest ZAR level in a month.