Sunset Market Commentary

Markets

What a difference a revision makes… So often overlooked final figures of monthly (EMU) PMI broke headlines today. The euro area economy returned to growth for the first time since May 2023 after an upwardly adjusted composite PMI (50.3 from 49.9). Further growth expectations are the most optimistic since the start of the Russian invasion in Ukraine back in February 2022. Renewed growth in business activity was aided by a stabilization of demand and continued efforts to clear backlogs of work. Inflationary pressures are easing though both input and output costs remain above pre-pandemic averages. The rate of job creation weakened slightly from February’s 7-month high. On a country level, Spain and Italy provided the greatest boosts with their growth rates accelerating to the strongest for nearly a year (composite PMI’s of respectively 55.3 and 53.5). Contractions in Germany and France were smaller than initially feared. In spite of the positive surprise coming from these PMI’s, markets didn’t even blink. Minutes of the March ECB policy meeting confirmed that the central bank is on track to lower its policy rate in June: “While it was wise to await incoming data and evidence, the case for considering rate cuts was strengthening.” With the timing of a first move “coming more clearly into view”. The EMU economy is expected to be weak for two more quarters with the ECB becoming increasingly confident on inflation. The jury remains out for H2 2024 policy decisions though with the central bank also admitting that the inflation profile is expected to be bumpy after the summer (low comparative base). On top, they expected oil prices to decline when presenting new GDP and CPI forecasts in March (avg Brent oil price $79.6/b compared to $90/b currently). We stick with to the view that EMU money markets are too aggressively banking on follow-up rate cuts after June (leaning to 3 additional ones by December). As for PMI’s, the market impact of ECB Minutes was non-existing. Weekly jobless claims were today’s only US eco release. They continue to hover near extremely low levels (221k from 212k), leaving it up to tomorrow’s payrolls report to decide on the fate of technical tests of resistance levels across the US yield curve. Trading was one stretched yawn during most of European dealings with one erratic move (core bonds higher; Bunds outperforming US Treasuries) at the onset of US trading. It’s somewhat of a continuation of yesterday’s rebound. The dollar continues drifting south with EUR/USD currently changing hands around 1.0870.

News & Views

Swiss CPI showed unchanged prices in March from February. Y/Y-inflation slowed from 1.2% to 1%. The stability of the index compared with the previous month was the result of opposing trends that offset one another overall. Prices for international package holidays and air transport increased, as well as those for clothing and footwear. Prices for supplementary accommodation and cars decreased, as did those for hire of private means of transport. Core inflation rose 0.1% M/M and 1% Y/Y (from 1.1%). Domestic prices declined 0.2% M/M, but were still 1.8% higher compared to last year. The disinflationary impact of prices of imported products eases as prices rose 0.7% M/M (-1.3% Y/Y). Inflation settled over the previous months well within the SNB’s target range (0%-2%) and justifies the 25 bps March SNB rate cut. With inflation at target, the SNB also wants to avoid a further rise in the real effective exchange rate to the franc. This aim is materializing. EUR/CHF today rose to 0.984, from below 0.92 at the turn of the year.

Minutes of the Riksbank’s March policy meeting confirmed that Swedish inflation has fallen slightly more than expected with forward looking indicators pointing to a continued fall in price pressures. Inflation (both CPIF including and excluding energy) is expected to return to 2% next year. Improving inflation prospects and the lower risk of inflation becoming entrenched at too high levels suggest that the RB approaches the situation where the need to conduct a contractionary monetary policy is declining. In this context, governor Thedeen sees “some probability of a policy rate cut in May, on condition that inflation prospects, including the development of the krona, do not deteriorate significantly”. Thedeen sees a fast start of the cutting cycle as providing greater flexibility to proceed cautiously with further adjustments to the interest rate. Despite the prospect of a ‘frontloaded’ May rate cut, the Swedish krona strengthened slightly today (EUR/SEK 10.51 currently). This might have been partially due to a strong rebound in the county’s PMI confidence indicators (composite PMI 52.8 from 50.6; Services PMI 53.9 from 51.2).