Markets
There is no stopping the repositioning on core (EMU and US) interest rate markets, even not in session with only second tier data. Economic confidence from the European Commission, contrary to most other data evidence of late, surprisingly deteriorated slightly (99.7 from 99.8 vs 101 expected). However, it was no reason to trigger a correction on the established yield rally. German yields today set new cycle peak levels for all maturities up to 10-y. At 2.58% the German 10-y yield touched the highest level since July 2011. The German 2-y yield (3.07%) even trades at levels not seen since October 2008. Markets now fully accept that the ECB won’t cut interest rates this year and even ponder scenario’s that see the hiking cycle lasting well into summer. German yields are rising 3-4 bps across the curve. The 30-y underperforms (+7.5 bp). Despite markets pricing a scenario of a prolonged Fed and ECB hiking cycle with a higher peak level, this recently didn’t translate into lower inflation expectations as measures by EMU and US inflation swaps. Inflation swaps across almost all maturities (both in the US and EMU) trade off the January lows. This ‘rebound’ also occurs despite a sharp decline in gas prices and oil holding at relatively low levels. One should be cautious too read too much in short-term swings in inflation swaps. Even so, it might suggest that also this market is having second thoughts that it won’t be that easy to bring down the kind of inflation caused by higher labour costs/a tight labour market which structurally adds to (services) inflation. US yields initially also tried a further upside test, but finally fell prey to a modest countermove easing between 4 bps (5-y) and 1.5 bps (30-y). US durable goods orders at least weren’t to blame. Headline orders declined 4.5% M/M after a 5.1% gain in January, but underlying non-defense ex aircraft printed strong both for orders (0.8% M/M) and shipments (0.7%). Equities today showed some resilience. For now, equity investors apparently aren’t overly worried that higher yields will immediately translate into an aggressive decline in global demand. The Eurostoxx 50 regains about 2.0% . US indices open 0.5%-1.0% in green.
FX markets aare mainly inspired by the daily swings in risk sentiment. The dollar rally takes a breather. DXY drops back below the 105 mark (104.85). After filling bids in the 1.0535 area, EUR/USD currently trades in the 1.0585 area. A constructive risk sentiment supports sterling. EUR/GBP returned to the 0.88 area as investors await the details of the new EU-UK brexit deal. CE currencies also took a strong start to the new week. EUR/CZK touched a new multi-year low near 23.60. The forint (EUR/HUF 379) is near the mid-month recovery top against the euro. Equally, the zloty extends its rebound (EUR/PLN 4.7125).
News Headlines
Commenting when the Bank of International Settlements published its quarterly review, head of economic research Borio said monetary authorities must “get the job done” when it comes to getting inflation back under control. Declaring victory too soon would invoke spirits of the ’70, when inflation rekindled after central banks lowered policy rates too soon and as a result had to hike them to painfully high levels afterwards. The BIS in this respect warned investors for overestimating the chances of rate cuts next year, saying that current pricing of policy rates declining materially in 2024 was in “sharp contrast” to what central banks were communicating. Interestingly, Borio also said there is nothing wrong with central banks slowing the tightening pace only to accelerate it again if needed.
Belgian inflation eased from 8.05% in January to 6.62% this month on a 0.70% M/M price drop, Statbel reported. Energy was a big contributor to the deceleration. Base effects resulted in energy inflation of -7.93% y/y with gas prices and electricity respectively 30.8% and 16% lower compared to February 2022. This caused the “housing, water and energy” component to drag the headline number 0.47 ppts lower. Core inflation (ex. energy and unprocessed food) rose further from 8.05% to 8.28% on increases in processed food products and services (up from 6.56% to 6.96%). This breakdown is critical in the ECB’s assessment. We expect other national numbers (tomorrow and Wednesday) and the EMU-wide inflation print (Thursday) to show similar dynamics.
