Markets
“It would be a cardinal sin to let up too soon.” ECB governing council member Nagel gave some hawkish comments on the sidelines of the G20 meeting of finance ministers. He expects the (flagged) robust rate increase in March and added that he doesn’t exclude further significant rate hikes may be needed beyond March. European money markets are currently more convinced about a downshift to 25 bps rate hikes from the May ECB policy meeting, rather than sticking with the 50 bps pace. Nagel says that recession fears are increasingly disappearing into the background, but with core inflation still much too high, monetary policy therefore has to tighten the reins. Next week’s February EMU CPI numbers could be crucial in shaping in expectations beyond March. Consensus expects monthly headline inflation to grow strongly (0.5% M/M) with the yearly number slowing from 8.6% Y/Y to 8.2% Y/Y. The German Bund started drifting from the start after these Nagel comments. The rest of European trading couldn’t really inspire with the focus turning to US January PCE deflators. Normally, this “outdated” news fails to trigger any market reaction given that CPI numbers are released earlier on the month and help shape expectations. This time around though, PCE deflators significantly beat consensus, rising by 0.6% M/M for both headline and core measure with upward revisions to January (and long term) data. The headline Y/Y-reading accelerated slightly from 5.3% Y/Y to 5.4% Y/Y with the core number up from 4.6% Y/Y to 4.7% Y/Y. Simultaneously, income and spending numbers were more mixed with the former rising by a lower-than-forecast 0.6% M/M, but the latter holding strong(er than expected) at 1.8% M/M. PCE deflators are the Fed’s preferred price gauge and suggests that more work has to be done this tightening cycle to get the inflation genie back in the bottle. US money markets are attaching more weight to the possibility that the Fed will have to return to a 50 bps rate hike in March. The US yield curve becomes more inverse with yields rising over 10 bps at the front end (2-yr tests 2022 high) and 3.4 bps at the very long end. The US 10-yr yield is attempting a weekly close above 3.9% which would be technically important and open the path for a return to the 2022 top at 4.33%. The German yield curve moves in parallel fashion with yields 11.1 bp higher for the 2-yr and 6.7 bps for the 10-yr. The latter is again testing key resistance at 2.55%. The core bond sell-off leaves its traces on stock markets with main European indices around 1% lower and key US benchmarks opening 1%-1.5% softer. The dollar extends this week’s gains in the risk-off climate with EUR/USD moving below 1.0550. The trade-weighted dollar moves above 105 for the first time since early January. USD/JPY tests 38% recovery on the decline between October ‘22 and January this year (136.67) with JPY-weakness amplifying the move following BoJ governor-nominee Ueda’s balanced parliamentary hearing this morning. It’s clearly too soon to frontrun a next Japanese normalization step.
News Headlines
The PBOC in its quarterly monetary policy report said it will provide “sustainable” support for the real economy without resorting to “flood-style” stimulus. Growth will rebound in 2023, the central bank expects, but the external environment remains “severe and complex” while drivers for the domestic recovery are not yet “solid”. Measures will be forceful but targeted, with a focus on domestic demand expansion, stabilizing growth, employment and prices. The PBOC expects inflation, currently at 2.1% (January), to remain mild overall but stressed the need to look out for potential price pressures in the future. On a sidenote, current PBOC governor Yi Gang is expected to step down when a government position reshuffle takes place next month. His successor, probably veteran banker Zhu Hexin, isn’t seen as a major gamechanger for monetary policy though.
The US announced new sanctions against Russia’s metal and mining sector. At today’s one year anniversary of the war Ukraine, the White House said it will raise tariffs on more than 100 Russian metals, minerals and chemical products, worth some $2.8bn to Russia. It didn’t specify by much though, only that it will “significantly increase costs for aluminum that was smelted or cast in Russia to enter the US market”. Bloomberg citing people familiar with the matter reported early February that the US was preparing a 200% import tariff. Russian industrial metals account for some 10% of US imports.
