Markets:
After yesterday’s US-driven decline in bond yields (poor US data), the market focus turned to ECB communication. ECB’s Knot, admittedly a member of the hawkish wing, set the tone by warning that the market should take the ECB’s guidance on multiple 50 bps rate hikes seriously. Speaking later at the WEF in Davos, ECB’s Lagarde also vowed to stay the course. ‘Inflation is still way too high’ and the ‘ECB remains determined to bring inflation to 2% in a timely manner’. The comments of the ECB president accelerated a tentative rebound in EMU yields and this was reinforced after the publication of the accounts of the Dec 15 policy meeting. At that meeting, the Governing council clearly wasn’t happy with the easing of market conditions (lower yields, higher equites) witnessed after the October meeting. ‘The loosening was seen as an unwelcome development and was judged inconsistent with the significantly more adverse euro area inflation outlook embedded in the staff projections’. Regarding the internal debate on the decision, a large number of members initially preferred a 75 bps increase. Finally some of these members agreed to a 50 bps hike if the communication was strengthened ‘on the Governing Council’s policy intentions and the enhanced message that the Governing Council would continue raising rates significantly at a sustained pace’. With respect to the reduction of the bond portfolio, some members also advocated a faster reduction than the €15bn/month that was approved for Q2. To summarize: the ECB unequivocally keeps the focus on fighting uncomfortably high inflation. Given recent market developments (easing of financial conditions), this assessment hasn’t changed going into the February meeting. After the recent sharp decline in yields, there is still long way to go to fulfill the ‘ECB’s wishes’. German yields are rebounding 5 (2y) to 1.5 bps (30y). It’s too early to call it the start of a bottoming out process, but at least the free fall has halted. US yields are rising between 3/2 bps. The combination of rising recessionary risks combined with hawkish central bank talk weighed on European equities markets. After an uninterrupted up-leg since the start of the year, the EuroStoxx 50 is ceding 1.6%. US equities, are losing 0.4%. The dollar still fails to really profit from a less positive risk sentiment. EUR/USD today held a tight sideways range in the lower half of the 1.08 big figure. (1.082). DXY still struggles to hold above the 102 handle. Sterling rebounds from the previous two sessions came to a halt; EUR/GBP rebounds a few ticks (EUR/GBP 0.876).
News Headlines
The Norges Bank kept its policy rate unchanged today at 2.75%, though some arguments called in favour of a (25 bps) rate hike. Since the December Monetary Policy Report, the labour market appears to have been a little tighter than projected while continued pressures in the Norwegian economy may contribute to keeping inflation elevated. On the other hand, there are prospects that energy prices will be lower than expected earlier, and global inflationary pressures appear to be easing. High inflation and higher interest rates are also weakening household purchasing power, and many firms expect a fall in activity ahead. Based on its current assessment of the outlook and balance of risk, the policy rate will most likely be raised in March. The Norwegian krone didn’t budge after the anticipated decision and holds near weak levels around EUR/NOK 10.75.
Swiss National Bank president Jordan told Bloomberg TV at the sidelines of the WEF in Davos that some tightening is probably still in the cards from the SNB. The policy rate stands at 1% currently (coming from -0.75%), with inflation still above 2%. Jordan says that headline inflation (2.8% Y/Y) will come down very quickly after spiking at the start of 2023, but the focus is on core inflation (2% Y/Y). The strong Swiss franc is one of the reasons why inflation remains relatively low, but the SNB won’t hesitate again to be active on the FX market if it becomes too strong. The SNB president expects the economy to cool this year, but avoid a recession. CHF weakened today from EUR/CHF 09890 to 0.9925 as global interest rates are on the rise again.
