Markets
European stocks gapped lower today. They had some catching up to do with Wall Street, where Fed governor Bullard pounded equities with his aggressive policy comments in European after-market hours. Losses in the EuroStoxx50 at some point mounted to 1.5% but were trimmed to 0.7% currently. US stock futures momentum improved throughout the European session, resulting into minor gains at the cash open. The S&P 500 is still only 6% away from its all-time high in early January. The equity resilience is striking given the increasingly hawkish Fed and recent surge by core bond yields, although that last part reversed a bit today. US yields shed 1.9-3.8 bps in the 2y and 5y after skyrocketing 21 bps and 13 bps respectively after yesterday’s 7.5% inflation shocker. Bets for a 50 bps rate hike in March have eased slightly as well but that’s more of a kneejerk counterreaction rather than the scenario actually being priced out. Yields at the long end are 1.6-2.1 bps down in the 30y and 10y respectively. The latter holds the psychologically important 2% though. The German curve flattens with yields changing -0.2 bps (2y) to -2.5 bps (30y). European swap yields fall 2-5 bps. While core bonds gain today, the genie is really out of the bottle in Europe’s peripheral markets. Italian, Spanish and Portuguese spreads over Germany’s 10y yield advance another 4 bps, bringing the total since the ECB’s pivot within a 18-24 bps range. Greece is worse off, seeing spreads rise 8 bps today and bringing the sum to almost 50 bps.
FX markets are trading in the background. The Swedish krone outperforms G10 peers but received a heavy blow yesterday after the Riksbank shattered all hopes on interest rate support any time soon. The yen takes second place, benefiting from declining core bond yields and the (though improving) negative climate. The euro trades on the backfoot against a mixed dollar. EUR/USD is fighting to retain the 1.138 support. The early break lower at the height of risk-off in any case proved false for now. USD/JPY failed to push through 116 resistance and DXY is unable to strengthen beyond 96. UK Q4 GDP growth was strong though largely in line with expectations. EUR/GBP was meandering in the low 0.84 area and initially didn’t do much with the figures. But sterling had to push just once to move the pair sub 0.84 and it did. 0.838 acts as support (Nov 2021 low).
News Headlines
The Hungarian central statistical office published January inflation numbers today. Inflation unexpectedly surged by 1.4% M/M to 7.9% Y/Y, the highest level since August 2007. Core inflation rose to 7.4% Y/Y, the highest in 20 years. Both are significantly above the central bank’s 3% (+-1ppt) inflation target. Details showed food prices rising by 10.1% Y/Y, consumer durables up 7.9% Y/Y and service prices 5.2% Y/Y higher. Hungarian price pressure remains despite caps imposed on staple food items last month and on fuel & energy earlier on. Other popular pre-election spending measures probably more than countered the impact on inflation. The Hungarian swap curve inverts further today with yields adding up to 22 bps at the front end in anticipation of a more aggressive Hungarian central bank stance. The MNB meets next on Feb 22. Its base rate currently stands at 2.9% and is playing catch-up with the one week deposit rate (4.3%). The forint trades slightly stronger at EUR/HUF 353.50.
The central bank of Russia raised its policy rate as expected from 8.5% to 9.5%, the highest level since Q1 2017. The Russian real policy rate now turned slightly positive again. CBR-governor Nabiullina suggested that more rate hikes are coming and didn’t exclude a move by the same magnitude. The new range for the average key rate this year is 9%-11%, coming from 7.3%-8.3% previously. Nabiullina says that the only way to bring inflation down is by a (central bank triggered?!) recession. Upgraded inflation forecasts show end-2022 inflation at 5%-6% with inflation expected to return to the 4% inflation target by mid-2023. The worsening labor shortage gets top billing as a source of inflation pressure, right after supply constraints. The Russian ruble cedes ground today with USD/RUB rising from 75 to 75.50.
