Markets
FX trading was extremely subdued in the run up to today’s US CPI release. Core bonds continued their post-payrolls drift south with the front end of the curve underperforming. Headline March US CPI eventually slowed from 0.4% M/M to 0.1% M/M (vs 0.2% M/M expected) with the annual figure falling from 6% Y/Y to 5% Y/Y (vs 5.1% Y/Y and lowest since May 2021). Core inflation printed exactly in line with consensus at 0.4% M/M (from 0.5%) and 5.6% Y/Y (from 5.5%; first increase since September 2022). Diving into the numbers shows core services rising by 0.4% M/M to be up 7.1% Y/Y with shelter costs increasing by 0.8% M/M and 8.2% Y/Y. The bigger inflation picture was thus by and large in line with forecasts. However, the market reaction was again quite large. Markets have become extremely sensitive to deviations from consensus, especially to the downside, since the collapse of some regional banks. We’ve seen the same reaction function last week following ISM’s, JOLTS and ADP employment. It led the Fed to drop forward guidance on ongoing rate increases with the March dot plot penciling in a final 25 bps move before pausing to watch how the fallout from the collapse of the likes of SVB would affect the economy. Several Fed governors expect a credit crunch to slow growth and help tackle inflation. Their guestimate is that it could have the effect of 1 to 3 additional 25 bps rate hikes. Tonight’s FOMC Minutes of that meeting could provide more insight on the issue. Our view is still that stubborn core inflation won’t allow the Fed to put its guard down in the inflation battle. Pausing too soon risks becoming the bigger policy mistake, allowing inflation to re-accelerate later on. Anyway, that’s not how markets look at it and we fear the current reaction function will remain the default one in coming weeks/months. US Treasury yields currently lose up to 4 bps at the front end of the curve (2-yr), but they are recovering from intraday lows (>-15 bps). US Treasuries in the process massively outperform German Bunds with Bund yields rising 5.9 bps (30-yr) to 7.8 bps (2-yr). The dollar spiked lower on the release with EUR/USD currently testing the March high at 1.0973. The YTD high at 1.1033 remains out of reach for the moment. The trade-weighted dollar (DXY) changes hands at 101.60, just above the March low at 101.41. EUR/GBP (0.8814) followed the move higher in EUR/USD, exiting the narrow 0.8750-0.88 range for the first time since April. The YTD low at 100.82 is still further away. European stock markets gain around 0.5% with key US indices opening 0.6%-0.8% stronger.
News Headlines
Hungarian inflation barely eased in March, coming down from a 27-year high of 25.4% to 25.2% Y/Y. Monthly dynamics remain very strong, coming in at 0.8% M/M. Food inflation is once again a key driver, registering a 1.5% M/M increase. But excluding that component (amongst other ones) shows no improvement, on the contrary. Core inflation even accelerated from 25.2% to 25.7% with sticky services inflation rising 1.9% M/M or 13% Y/Y. The latter combined with a 16% Y/Y wage dynamic could slow the disinflationary process in coming months. Today’s inflation print gives the central bank no room to cut rates anytime soon. KBC Economics expects the hawkish stance from the NBH to remain with us in the following weeks, making a cut in April unlikely and in May at the very least uncertain. Once started, the O/N tender rate (currently 18%) may be cut at a 100 bps/meeting pace. The Hungarian forint reacted stoic with EUR/HUF trading unchanged at around 375.70. In a broader perspective, the currency had a good run since mid-March, bringing it to around the strongest levels in a year.
Fewer German companies plan to increase prices in the next three months, the ifo Institute’s latest survey finds. For the economy as a whole, price expectations balance fell for a sixth month straight from 29.2 points to 27.2. This compares to a peak/series high of 60.6 points set in April 2022. The current reading is nevertheless markedly higher than the long-term average of 14.3. The easing was broad-based across sectors, with construction and manufacturing taking the lead, trade followed at a distance. Companies in the services sector on the other hand marginally strengthened their price plans again, from 31.7 to 34.7 points.
