Markets
Positive risk vibes coming from WS yesterday and Asia this morning, triggered a positive start in Europe as well. The single currency profited, with EUR/USD reaching for the 1.09 handle. Opening moves occurred in the run-up to EMU January PMI releases. Recall that markets since November reacted asymmetric to economic releases. They embraced negative economic surprises and below-consensus inflation prints. Both from the point of view that these would stop central banks from executing their monetary policy normalization plans. It led to the current situation where market positioning is completely misaligned with central bank guidance. Markets are betting on a lower policy rate peak than central banks suggest while simultaneously betting on a soon (<6 months) policy reversal once rates hit those peak levels. Central banks stress the opposite: don’t expect any rate cuts say in the next 12 months after hitting the peak. It’s important to keep this situation sketch in mind when looking at today’s EMU PMI’s and the market reaction. Both EMU manufacturing (48.8 from 47.8) and services PMI (50.7 from 49.8) beat consensus with the composite number (50.2 from 49.3) moving back above the 50 boom/bust handle for the first time since June 2022. S&P Global, responsible for the surveys, dedicated the tentative return to growth to markedly improving prospects for the year ahead with order books meanwhile showing reduced rates of contraction. Employment growth also picked up momentum as firms prepared for a better than previously expected year ahead. The PMI survey adds to evidence that the EMU could escape a recession with the nadir being reached back in October. Falling energy prices, easing supply chain stress and the Chinese reopening restored confidence since though we’re not out of the woods yet. Average selling prices for both goods and services ticked higher, reflecting still-elevated cost growth and upward wage pressure. Those strengthen the case for monetary policy makers to pursue more normalisation/tightening in their inflation crusade. For the first in a long time, that’s how European markets reacted post-PMI’s. Although the move lacked real strength, it was clearly directional. The EuroStoxx50 trades 0.7% off its intraday high. European bonds – who already sold off in recent sessions – grinded a few ticks lower. EUR/USD fell back to 1.0860. EUR/GBP surged from 0.8770 to 0.8840 with sterling weakness stemming from disappointing PMI’s (composite 47.8 from 49). US January PMI’s beat consensus as well, rebounding slightly more than forecast. The composite measure increases from 45 to 46.6 (still way into contraction territory). In a first reaction, US yields and the dollar gain a few ticks, as does – somewhat counterintuitive – US stocks. Moves remain very limited in absolute terms.
News & Views
The German government is due to lift its 2023 GDP projection from a 0.4% contraction to a 0.2% expansion, Bloomberg reported citing people familiar with the new forecasts. Growth for next year is seen at 1.8% from 2.3% earlier. The previous forecasting round dates back from October. At the time, fears for an energy crunch during the winter ran high and installed a mood of doom and gloom. An unusually warm winter helped cut gas/energy consumption and, combined with diversifying supplies, have eased much of those concerns. Economy minister Habeck will present the updated projections tomorrow.
Hungary’s central bank (MNB) kept the base rate steady at 13%. The MNB has said before that this level is adequate to manage fundamental inflation risks. Inflation rose to 24.5% in December due to a pick-up in fuel prices but should start to ease slowly in the first half of 2023. But still-elevated inflation expectations require a tight monetary policy for a prolonged period. To enhance monetary policy transmission, it will further absorb interbank liquidity through, amongst others, its one-day deposit quick tenders for which the rate is set at 18%. The MNB vowed to maintain the current terms of these emergency measures introduced in mid-October “until a trend improvement in risk perceptions occurs”. Some forint investors doubted the MNB’s commitment, thinking the central bank would be lured by the recent easing in global financial conditions to cut the 18% shadow policy rate already. Together with the doubling in the required reserve ratio to 10%, the Hungarian currency rallied. EUR/HUF fell from 398 to the recent lows around 392 currently. Most Hungarian swap yields pared losses of as much as 25 bps to trade 5-10 bps lower.
