Markets
Unexpectedly accelerating inflation in France and Spain set the tone right at the start of European dealings. Core bonds slid with European bonds evidently underperforming US Treasuries. German yields rose 6.2-7.6 bps across the curve with a slight underperformance at the belly. The 10y yield closed above 2.57% resistance to set a new cycle high. US yields added 2.5-3.9 bps at the front end and less than 2 bps elsewhere (excluding the 30y; -1 bps). The 10y yield over there continues to test important resistance around 3.95%. Both European and US bond yields finished off intraday highs though, following an unexpected decline in US Conference Board consumer confidence (from a downwardly revised 106 to 102.9), on the back of a worsened expectations component. But that doesn’t change the evolving market narrative towards hawkish central bank policy to remain in place for longer. In the EA, money markets are gradually pricing in a peak policy rate of 4%, the US is shifting towards 5.5-5.75% with a rate cut no longer fully priced in at the end of the year. Equities, both in Europe and the US, tried a comeback after initially being whipped by the yield rise but in the end finished with some losses still. The dollar took the lead on currency markets. EUR/USD closed near recent lows below 1.06, the trade-weighted DXY (104.869) erased about half of the losses incurred on Tuesday. Sterling’s Windsor Framework boost already faded, as sentiment on equity markets took a turn for the worst. EUR/GBP rebounded from an intraday low at 0.8755 to 0.8798.
Asian stocks this morning get a boost from the ongoing Chinese PMI rebound. The non-manufacturing gauge rose well into expansion territory (56.3). The manufacturing PMI came in at 52.6, lifting the composite figure to 56.4. Details were strong. The Chinese yuan’s comeback enters its third day. USD/CNY falls to 6.90 with some sentiment-driven dollar weakness at play too. Strong Chinese data also supports currencies Down Under (AUD, NZD). EUR/USD oscillates around 1.06. US yields add less than 2 bps across the curve. German yields face a higher opening as well.
German CPI numbers are key to watch in European dealings today. A first regional publication came in at 0.1% m/m and 8.5% y/y (North Rine Westphalia). With the recent methodology change it’s tricky to draw firm conclusions for the national number though (expected at 0.7% m/m and 9% for the harmonized figure). In any case we look out for the German 10y yield to confirm yesterday’s break higher. That would improve the technical picture, opening the way towards 3%. The focus shifts to the US in the afternoon with the publication of the manufacturing ISM, seen bottoming out from 47.4 to 48. While we see some upward surprise risks, the leap higher in the 10y yield here might be tricky with the services gauge still due on Friday. As ever, EUR/USD’s daily momentum depends on the overall risk sentiment. The likes of stocks have been proven resilient recently, especially in Europe, providing a bottom for the euro while it lasts. 1.068 is a first resistance.
News and views
Australian GDP grew by 0.5% Q/Q in the final quarter of 2022, down from 0.7% growth in Q3 and below 0.8% consensus. Y/Y-growth slowed to 2.7%. Total consumption (0.4% Q/Q) and exports (1.1% Q/Q) were the main growth engines. Changes in inventories subtracted 0.5 percentage points from GDP growth while private gross fixed capital formation fell 1.7% Q/Q. The Bureau of Statistics said that continued growth in household and government spending drove the rise in consumption, while increased exports of travel services and continued overseas demand for coal and mineral ores drove exports. The contribution from households is losing momentum though, with a 4.3% Q/Q decline in imports adding to that picture. On top, the household saving ratio fell from 7.1% to 4.5%, the lowest level since Q3 2017. Compensation of employees increased 2.1% Q/Q, pointing to the tight labour market. The GDP implicit price deflator rose by 1.6% Q/Q and 9.1% Y/Y. Monthly January CPI inflation, released as well this morning, slowed in Y/Y-terms from 8.4% to 7.4%. The Aussie dollar initially dipped to the recent lows against the greenback (AUD/USD 0.67), but soon rebounded on strong Chinese PMI’s and the ebullient risk sentiment.
UK shop price inflation rose to another record high (8.4% Y/Y from 8%) in February as retail prices across the board continued to react to the impact of soaring energy bills, higher running costs and tougher trading conditions brought about by the war in Ukraine. Details from the British Retail Consortium’s indicator showed overall prices rising by 0.8% M/M, with both food (1% M/M; 14.5% Y/Y) and non-food (0.7% M/M; 5.3% Y/Y) contributing.
