Sunset Market Commentary

Markets

No surprise from the ECB today as the central bank kept its deposit rate unchanged at 4%. While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term. New staff projections show downward revisions to inflation forecasts this (5.4% from 5.6%) and next (2.7% from 3.2%) year with the 2025 forecast unchanged (2.1%) and the first estimate for 2026 suggesting a return below the 2% inflation target (1.9%). Underlying core inflation however is projected to remain above 2% over the full policy horizon. ECB staff see growth picking up from an average of 0.6% for 2023 (from 0.7%) to 0.8% (from 1%) for 2024, and to 1.5% for both 2025 (unchanged) and 2026 on rising real incomes and improving foreign demand. Unlike Fed Chair Powell, ECB Lagarde did push back against market expectations of rapid rate cuts: “we should absolutely not lower our guard on inflation”. She suggested that the flatter inflation path was still based on market rates at the end of November cut-off date (3-month forward Euribor curve at least about 25 bps higher) and that wage data aren’t declining yet. She also stressed that there was absolutely no debate or discussion on rate cuts, unlike yesterday’s Powell hints. ECB rates will plateau for some time. Finally, the ECB decided to advance the normalization of its balance sheet by stopping full PEPP reinvestments after H1 2024. Over H2 2024, the central bank intends to reduce the portfolio by €7.5bn/month before discontinuing reinvestments all together at the end of 2024. In a daily perspective, European yields recover from huge, Fed-induced, opening losses. EUR/USD extends yesterday’s rally from 1.09 to 1.0950 while European stock markets trade nice gains for a 0.50% surplus.

he Bank of England kept its policy rate unchanged at 5.25% in a 6-3 vote similar to the one in November. BoE Greene, Haskel and Mann again voted in favour of a 25 bps rate hike but couldn’t tip the “finely balanced” status quo. The MPC nevertheless judged that monetary policy was likely to need to be restrictive for an extended period of time with further tightening being required if there were evidence of more persistent inflationary pressures. BoE governor Bailey confirmed that “there is still some way to go to get inflation all the way back to 2%”. Upward risks to services inflation and wage growth are key in the short term, suggesting inflation won’t repeat the drop from September to October (6.7% to 4.6%), but rather stabilize near to its current rate. BoE staff expect Q4 GDP growth to be flat compared with 0.1% growth in the November Monetary Policy Report. Chancellor Hunt’s fiscal measures announced in the Autumn Statement will increase the level of GDP by around 0.25% over coming years, but boost potential supply to some extent as well and thereby reduce inflationary pressures. The BoE’s tone contrasted with the Fed as well with UK yields showing a similar intraday rebound. EUR/GBP is unchanged near 0.8620.

News & Views

The Swiss national Bank (SNB) left its policy rate unchanged at 1.75%. The SNB statement omitted guidance that further tightening still might be needed. According to the new SNB projections, inflation will be within the 0%-2% target over the policy horizon. SNB governor Jordan at the press conference said that monetary conditions are now adequate. The SNB expects modest growth between 0.5% and 1.% next year. In this environment, unemployment is likely to continue to rise gradually. On further steps (easing), Jordan indicated that the SNB will look very careful at the new forecast in March. The SNB remains prepared to be active in the FX market, but didn’t repeat that this will be in the direction of selling FX. The SNB might even change tactics if the exchange rate makes monetary policy too restrictive. The Swiss franc traded volatile after the meeting and briefly weakened above EUR/CHF 0.95 (currently 0.949). The easing of global conditions clearly mitigates the impact of the change in tone at the SNB.

The Norges Bank (NB) surprised markets by proceeding with a final 25 bps rate hike to 4.5%. The NB acknowledges that the economy is cooling but inflation remains too high. In its new projections, the NB sees inflation cooling from 5.5% this year to 4.4% next year and 2.8% in 2025. However, even at the end of the policy horizon in 2026, inflation is still seen above the 2% target (2.5). The NB now shifts to a more balanced approach and guides that the policy rate will likely remain around 4.5% until autumn, before gradually moving down. Persistent weakness of the krone was an important factor for the NB to proceed with today’s rate hike. The valuation of the currency “could make it more challenging to bring down inflation” governor Ida Wolden Bache said at the press conference. In this respect, today’s rate hike at least yielded some results. EUR/NOK dropped further from the 11.70 area to 11.52 currently.