Sunset Market Commentary

Markets

US yields softened going into the weekend as a poor manufacturing ISM triggered a short squeeze. Today, the calendar was almost empty. However, with several key events/data scheduled later this week, markets didn’t draw any firm conclusions from Friday’s repositioning. In technical trade, US yields even reverse a big part of Friday’s setback, adding about 5 bps across the curve. German yields, which hardly followed the decline in de US on Friday, change less than 1 bp across the curve. Both US and EMU money markets currently see about 90% chance of both the ECB and the Fed starting with a first 25 bps rate cut in June, with a reality check to follow later this week.

Regarding the data part of this reality check, the US will take center stage. Tomorrow, the services ISM is expected to hold well above the 50 mark (53). After Friday’s disappointing manufacturing measure, markets might become a bit more sensitive to a softer than expected release. The same is true in case of weaker US labour market data (JOLTS job openings and ADP on Wednesday, payrolls on Friday). However, given the upward January inflation surprise, one shouldn’t expect the Fed to feel forced to change ‘guidance’ after just one set of less buoyant activity data. At his hearing before Congress on Wednesday/Thursday, Fed’s Powell can easily hold the message that recent data perfectly justify MPC’s December dots for a gradual approach of 75 bps of cumulative easing this year. ECB’s Lagarde at the press conference on Thursday probably will face more questions as to what extent ongoing sluggish growth will affect the start of its easing cycle. Headline inflation probably will be downwardly revised in the new ECB staff forecasts, but we see little reason for the ECB to change its assessment on core inflation until it is ‘sure’ that wage negotiations are in line with (core/services) inflation returning to 2% in a sustainable way. Due to softer activity data, Lagarde’s wait-and-see narrative might be slightly less convincing that Powell’s, but she has also as every reason not to complicate future policy steps by giving the market a pretext to ease monetary conditions prematurely.

Briefly returning to FX, volatility remains extremely low with no clear directional bias for the US dollar. DXY is going nowhere in the middle of the ST consolidation range between 103 and 105 (currently 103.9). EUR/USD gains marginally (1.085), but first resistance in the 1.09 area stays out of reach. Sterling gains marginally with EUR/GBP easing to 0.856 as investors ponder the chances of some fiscal support as UK Chancellor of the Exchequer Jeremy Hunt will present the government’s ‘final’ (spring) budget going into the parliamentary elections expected in autumn.

News & Views

Swiss inflation picked up in February, with the monthly pace accelerating from 0.2% to 0.6% vs 0.5% expected. Favourable base effects still allowed for the Y/Y figure to ease from 1.3% to 1.2% – be it slightly less than anticipated. Core inflation (ex. fresh and seasonal products, energy and fuel) rose a solid 0.7% as well, to be up 1.1% y/y. The Swiss franc’s attempt to rise on the release was very short-lived. The Swiss National Bank meets on March 21 and today’s CPI numbers have barely changed market’s 50-50 assessment whether or not the SNB will kick off with a first rate cut. If any, they pared bets somewhat as the sharp monthly CPI bump indeed warrants a cautious approach towards monetary easing. EUR/CHF is testing the 0.96 big figure, the highest level since end-November and more than 300 points higher than the all-time low (closing levels) seen around the turn of the year.

Turkish inflation rose 4.53% m/m, pushing up the yearly figure from 64.86% to 67.07%. All subcomponents printed higher with hotels, cafes and restaurants (+5.43% m/m), food (+8.25%) and education (+12.76%) composing the top three. Underlying inflation gauges (ex. energy, food and non-alcoholic & alcoholic beverages, tobacco and gold) rose a monthly 3.57% to a new record of 72.89%. It begs the question whether the central bank has raised policy rates high enough. After having hiked to 45% in January, the CBRT signaled a pause in the cycle. It retained the option of further hikes of needed but that doesn’t change the fact real rates are and will stay extremely negative for some time to come. That keeps the Turkish currency vulnerable on international markets, despite an improving external position. EUR/TRY today moves further north of 34, a new record TRY-low. USD/TRY is similarly hitting new highs around 31.53.