Markets
European (equity) markets took a rather constructive start for the new week despite a further rise of core/US yields at the end of last week and market uncertainty on mostly stronger than expected Chinese eco data this morning. Stronger data currently often bring mixed feelings to markets as they raise questions on a potential scaling back of (fiscal and monetary) stimulus. European equities opened with gains of about 0.5% but sentiment dwindled as the session continued. There were few data in Europe. In the US, the Empire manufacturing survey showed a further improvement both in the current pace of the recovery and in expectations for the economy 6 months ahead. The headline index rose to 17.4, the highest reading since November 2018. Especially the price components (both currently and in the future) rose further, indicating the risk for higher input prices at a company level to filter through toward end-prices. The market reaction to the report was modest. US investors also pondered press headlines that additional US government measures to support the economy and improve infrastructure will probably at least partially be financed by higher corporate and personal taxes. For now the direct impact on markets is limited. US equities are trading little changed from Friday’s closing levels. Bond investors also take a cautious stance ahead of key upcoming events later this week, with US retail sales and a 20-y auction scheduled for tomorrow and the Fed policy decision on Wednesday. US yields decline up to 1.75 bp for the 10 & 30-y sector. However, with the 10-y yield still north of 1.60%, today’s move should be labeled as a consolidation rather than a correction. German yields also decline modestly (1-1.5 bp for the 5-10y sector). German bunds tentatively entered a sideways consolidation pattern after the ECB announcing stepping up the pace of bond purchases. However, for now there is no technical sign of a genuine change in trend. The -0.34%/-0.38% support for the 10-y German yield still survives. After some post-ECB narrowing at the end of last week, 10-y peripheral spreads against Germany hardly changed today.
The dollar retains the benefit of the doubt. Most USD cross rates including the TW dollar index DXY (currently 91.85) and EUR/USD (1.1920) area holding within the tight ranges that were already in place at the end of last week. USD/JPY remains the exception to the rule, extending gains north of 109. Markets apparently take the view that this week’s policy meetings of the Fed and the BoJ will only confirm the BoJ to stay far behind on the process to any policy normalization. With few eco data on the agenda and investors also counting down to Thursday’s BoE meeting, EUR/GBP also held its sideways trading range in the upper part of the 0.85 big figure (currently 0.8585). Brent oil tested the $70 p/b this morning, but fell prey to profit taking later in the session.
News Headlines
The Russian central bank is considering to move faster with normalizing policy than previously signaled, according to a person close to the discussions, adding it may bring its policy rate (now 4.25%) up by 125 bps this year. Higher-than-expected inflation (5.7% y/y in February vs. a 4% target) and plans for increased government spending are pressuring the central bank to shift its accommodative stance. Governor Nabiullina last Friday said the bank may move to a neutral policy (implying at least 75 bps of rate hikes) this year. The Russian central bank meets Friday.
Polish inflation slowed more than expected, from 2.7% y/y (0.5% m/m) in January to 2.4% in February (vs. a 2.6% consensus). Housing as well as food price pressure significantly eased from a (regulatory and tax) boost in January, weighing on the headline figure. The central bank (NBP) aims for 2.5% inflation with a 1 ppt tolerance band on either side and expects price raises to average at about 3.1.% this year amid supportive base effects. Core inflation is seen at 2.7% this year. The Polish zloty is slightly losing (EUR/PLN 4.588). The NBP FX intervention threat keeps the zloty weak also from a longer-term perspective.
