Sunset Market Commentary

Markets

This week’s market story was all about US price data which dashed investors hope on a May Fed policy rate cut. January CPI delivered the first and biggest blow on Tuesday by unexpectedly accelerating on a monthly basis and keeping Y/Y-equations more sticky than hoped (3.1% headline & 3.9% core) with a special mention to services and housing related costs. Less important, but again consensus-overtaking import and export prices yesterday neutralized an attempt by US Treasuries to rally on disappointing retail sales. Third time’s usually the charm, though not this time around. January producer prices accelerated by 0.3% M/M (headline) and 0.5% M/M (core) while consensus forecasted only 0.1% for both. The January price update (with only PCE deflators missing; Feb 29 release) highlights the bumpy path ahead, both for markets and for the Fed. The former now even doubt whether the Fed will be able to pull the trigger in June (80% probability)!! The data amplify overnight comments by Atlanta Fed governor Bostic who defended a view consisting of only two rate cuts this year with a first one only in July. US Treasuries sold off in the wake of PPI data with US yields currently rising by 6 bps (30-yr) to 9 bps (2-yr). The US 2-yr yield set a new YTD high at 4.72%. The US 10-yr yield tested the similar reference at 4.33% which also coincides with the 100 day moving average. The dollar profited from the interest rate support, but the move lacked technical relevance. EUR/USD is currently changing hands around 1.0750. ECB comments (see News & Views) failed to impact the pair. We don’t expect any additional follow-up technical action during today US trading session given the upcoming long week. US markets are closed on Monday for President’s day. EUR/GBP trades close to opening levels around 0.8550, with the UK currency failing to profit from strong UK retail sales. Following this week’s economic update, we believe that the EUR/GBP 0.85 support zone is once again stronger.

Next week’s eco calendar is far less enticing that this week’s jam-packed US agenda. On Tuesday, the ECB publishes an in-house, forward-looking, indicator of negotiated wage rates. The day after, the FOMC publishes Minutes of the January policy meeting. On Thursday, it’s the ECB’s turn with global PMI’s on the agenda as well. It’s next week’s main dish with EMU consumer inflation expectations rounding off on Friday.

News & Views

Mario Draghi said central banks should give European sovereigns the space to invest in the green transition and robust supply chains, adding governments need sufficiently low borrowing costs to finance the shift. The former ECB president made the comments in the context of being mandated by the European Commission to seek ways to revitalize the European economy in the face of increased Chinese and US competition. Draghi has never been shy of airing controversial proposals, including during his tenor as head of the ECB. This time around, his call could be seen as a contentious one because it would risk creating the perception of (some form of) monetary financing. The ECB currently keeps policy rates at an elevated level to fight inflation that’s still above target. Draghi said, however, that central banks should focus on keeping inflation expectations anchored and look through “temporary upward price shocks”.

ECB’s Schnabel again warned for caution against calling victory over inflation. Challenging French governor Villeroy’s quote this morning that “the last mile of taming prices is not harder by nature”, the German board member noted that Europe’s sluggish productivity growth may slow the fall in inflation to the 2% target. She explained that “Persistently low, and recently even negative, productivity growth exacerbates the effects that the current strong growth in nominal wages has on unit labour costs for firms” which may eventually get passed on to consumers. Factors behind this underperformance vs the US include lower investment in technology, more red tape and more expensive energy, she noted.