Markets
Both European and US bonds took a serious punch end of last week. In Europe it resulted from ECB’s Lagarde stopping short of formally announcing a policy U-turn. The stellar January labour report was responsible for a sharp sell-off wave in the US on Friday. Investors continue selling after the weekend in a fairly uneventful trading session. Moves are more limited though, especially at the short end, and it doesn’t end up in a flattening of the curve anymore. The German Bund still underperforms the US. Changes vary from -2 bps (2y) over 2.2 bps (10y) to 4.5 bps (30y) with real yields still in the driver’s seat. European swap yields add 0.6 bps (2y) to 8 bps (30y). Peripheral spreads continue to widen on the prospect of less monetary stimulus, in some cases very aggressively. Italy adds another 9 bps, bringing the total to 24 bps since the ECB pivot. Greece soars a whopping 25 bps, hitting a cumulative 43 bps since Thursday. US yields decline 1.5 bps at the front end (2y) while adding 1.4-2.1 bps at the other side of the aisle (10y/30y). This week’s focal point will be US CPI inflation on Thursday. A further increase towards 7.3% headline and 5.9% y/y core inflation is expected. Judging today’s US bond moves and taking into account that already more than five hikes are discounted for this year, it’ll probably take a significant beat to keep yields going strongly. We also mention the start of the US Treasury’s mid-month refinancing operation in the new funding quarter, featuring a 3-year, 10-year and 30-year auction tomorrow, Wednesday and Thursday respectively. We expect them to enjoy investor interest after the recent steep rise in yields.
It’s relatively quiet on other financial markets. European stocks eke out a gain of a little over 0.5%. Wall Street opens virtually unchanged (+0.2%). The euro on currency markets is slightly losing out against all majors. EUR/USD eases from 1.145 to 1.1422 but keeps it flat against sterling (EUR/GBP going nowhere at 0.845). The Aussie dollar tops the scoreboard, profiting from a fourth quarter with record retail sales as well as Australia’s PM announcing to reopen borders for tourists after two years. The Polish zloty outperforms peers in the Central European region. EUR/PLN falls through 4.55 to 4.53. The central bank meets tomorrow. Consensus expects another 50 bps rate hike. It would be the absolute minimum not to upset markets given run-away inflation (8.6% headline in December). At EUR/CZK 24.31, the Czech koruna is nearing the strongest level in a decade again. Hungary’s forint trades stable at 353.
News Headlines
Czech industrial output increased by 6.4% in 2021 after having decreased by over 7% in 2020. The production volume increased in an overall majority of economic activities of industry in a virtually even manner. However, due to difficulties in production of motor vehicles, the pre-covid level has not been attained. Car production plants at the end of 2021 continued to struggle with issues in supply chains and increasing prices of materials and energy. The Czech trade balance ended the year with a CZK 1.5bn deficit, coming from a CZK 179.9bn surplus in 2020. Since the beginning of the year, Y/Y exports and imports have grown by 13.0% and 19.2%, respectively.
French President Macron will meet Russian President Putin in Moscow today in an effort to de-escalate the Ukraine crisis. The FT cites advisors that Macron’s approach is to persevere with “Normandy format” talks between Russia, Ukraine, France and Germany over the Russian-backed separatists in eastern Ukraine, to try to persuade Moscow to pull back its forces and tone down its efforts to destabilize Ukraine, and finally to forge a new long-term security arrangement for Europe.
