Markets
The EU and the UK struck a deal to reform the Northern Irish Protocol. Dubbed the Windsor Framework, the agreement entails a so-called green lane in the Irish Sea with significantly reduced checks for goods coming from the UK mainland and destined to stay in Northern Ireland. Goods continuing into Ireland, part of the European single market, need to follow a red lane. The pound profited though strengthened already in the run-up on rumours that an announcement was coming. EUR/GBP fell from 0.883 to 0.8795. In core bond markets, US Treasuries and German Bunds parted ways. While both headed south initially, UST’s found a bid going into US dealings, leading to yield losses of -3.1 to -4.7 bps in the 2y-10y bucket. That’s despite some strong US data (core capital goods orders & shipments and pending home sales). German yields across the curve meanwhile all hit new cycle highs with gains ranging from 3.3 bps to 7.5 bps with the 10y yield heavily testing critical resistance at 2.56% (62% recovery on the 2007-2020 decline). The same tenor in swap yields is hitting an important reference at around 3.2%. That didn’t stop European equities from staging a forceful comeback after Friday’s sell-off. The Euro Stoxx 50 rebounded at some point 2% to close with gains of 1.66%. Wall Street rose 1.5% only to pare gains as the US session evolved. The most important indices eventually finished between 0.22%-0.63% higher. The dollar was pressured, lifting EUR/USD back above 1.06 and DXY below 105.
A Reuters interview with ECB chief economist Lane published this morning grabs some headlines in an otherwise uneventful Asian session. The Irishman said forward-looking indicators suggest inflation will slow down, but that the case for a 50 bps rate hike in March remains solid. He added that when rates hit their plateau, they will probably stay there for “quite a long-lasting period, a fair number of quarters”. Barring a few exceptions, regional stocks eke out a slight gain. The dollar appreciates with EUR/USD struggling to keep the 1.06. US cash yields advance a few bps.
Today’s economic calendar contains some US regional business confidence indicators and Conference Board consumer confidence for February. The latter is expected to improve slightly from 107.1 to 108.5. EU member states France and Spain publish February inflation numbers, seen at 7% (vs. 7% in January) and 5.7% (vs 5.9%) respectively. As a precursor for the European number due on Thursday, they will set the tone on markets in early European dealings. With European yields at important technical crossroads, just imagine what an upward inflation surprise could do. EUR/USD’s daily fate depends on whether a sustained core bond yield advance spills over to equity markets (eg. Friday’s market moves). Support in the pair is located at 1.0461/1.0479. For sterling we think the NI protocol boost will be short-lived. The currency wasn’t really bothered with the issue anyway while there are more important things at hand in mainland UK, including a cost-of-living crisis.
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Australia’s current account surplus increased by $13.4bn to $14.1bn in Q4 2022. The increase is mainly due to the second highest on record trade surplus of $40.9bn. Exports of goods and services increased 3%, driven by rises in metal ores and minerals as constraints eased and travel services as the number of international students and visitors arriving in Australia increased. Imports of goods and services declined 3.1%. The rise in the trade surplus of $6.1bn is expected to contribute 1.1 percentage point to Q4 GDP growth. The Australian net primary income deficit (2nd component of current account balance) declined from a record $30.4bn in Q3 to $26.4bn in Q4. It remains historically high though due to high operating profits on direct investment off the back of continued strength in commodity prices, according to the Australian Bureau of Statistics. In a separate release, Australian retail sales rose slightly more than expected in January (1.9% M/M). AUD/USD this month lost out against an overall strong dollar, with the pair falling from 0.7150 towards 0.67. Next support kicks in around 0.6547.
Polish President Duda yesterday accused the EU of using various legal loopholes and questionable interpretations just to show that it can influence the legal order of a member state. The aggressive rhetoric follow’s the President’s decision not to sign into law the government’s plan to change Poland’s court system to unlock €35bn of EU funds. Instead, Duda sent the legislation to Poland’s top court – part of the EU’s complaints – for a review. The maneuvering suggests that the stalemate might only be solved after Polish elections in October.
