Markets
The 10-y Bund yield yesterday decisively cleared the key 2.55%/2.57% resistance on higher-than-expected French and Spanish CPI data. Today, German CPI only reinforced the case for further follow-through gains. German HICP also printed at a higher-than-expected 1.0% M/M and 9.3% Y/Y (9.2% in January), signalling upside risks also for the EMU-figure to be released tomorrow. German yields again add between 7 bps (5-y) and 5 bps (30-y). Markets ever more embrace the scenario that the ECB will (have to) raise its policy rate to 4.0% rather than 3.75%. Comments from ECB members Villeroy and Nagel at least didn’t contradict market pricing. Villeroy said that as core inflation continues to rise ‘no one can any longer deny that monetary policy can react and must react’. He also repeated that it is desirable for the ECB to reach its cycle terminal/peak rate by September. Buba president Nagel stated that the ‘the interest step announced for March will not be the last. Further significant interest rate steps might even be needed afterwards’. He also advocated an accelerated roll-off of the ECB balance sheet in July from €15bn to €20bn per month. The rise in US yields again lags the EMU, with US yields up by less than 2-4 bps across the curve, as investors await the outcome of the US manufacturing ISM after finishing this report. BoE governor Bailey in a speech kept a balanced tone. He indicated that further rate increases might be needed. However nothing has been decided yet. At the February policy meeting, the BoE indicated that rates might be raised further if it saw more evidence of persistent inflationary pressures. Better UK eco data of late already caused markets to position for an additional 75 bps of rate hikes. Bailey’s balanced comments apparently made investors ponder whether they have discounted enough tightening for now. Gilts outperformed Treasuries and Bund with yields easing up to 7 bps (2-y). Expectations for a prolonged period of tight monetary conditions (especially in the US and Europe) still don’t hurt the bid for risky assets in a profound way. Unexpectedly strong Chinese PMI’s this time supported equity resilience even as positive momentum ebbed as US traders joined. The Euro Stoxx 50 gains 0.3%. US indices open little changed. Cyclical commodities like copper gain on strong China PMIs/growth prospects. Energy prices (Brent oil $83 p/b, gas) hardly gain.
A higher interest rate differential combined with ongoing (European) equity market resilience favour the likes of the euro over the US dollar. EUR/USD rebounded from 1.0575 this morning to currently 1.0675. A break above EUR/USD 1.0803 would call off the euro correction/USD rebound. DXY also drifts lower to currently 104.30. Balanced comments of BoE’s Bailey and lower UK yields obviously disappointed sterling bulls. EUR/GBP jumped sharply from the 0.88 area this morning to currently trade near 0.8885.
News Headlines
Bank of England figures showed that mortgage approvals fell to 39.6k (from 40.5k) in January, the lowest level since June 2020. Apart from the Covid-pandemic, it’s the lowest monthly number since January 2009. Weaker mortgage approvals stem for the rapid rise in interest rates and the drop in disposable income during the current cost-of-living crisis. First-time buyers have to spend around 45% of their pay check to mortgage payments (assuming rate of 5.5%), which is a level that prevailed ahead of the financial crisis. Earlier today, the Nationwide Building Society reported a 0.5% M/M decline in nationwide house prices (-1.1% Y/Y, first negative number since December 2012). Today’s data reinforce the view of a shaky UK housing market.
The Czech manufacturing PMI fell from 44.6 to 44.3 in January. Details showed another monthly fall in output and a steeper contraction in new orders. Domestic and foreign client demand continued to contract amid pressure on spending from energy costs, inflation and economic uncertainty. The outlook for the next 12 months remains subdued. Inflationary pressures softened notably as rates of increase in input costs and selling prices eased to the slowest since September 2020 and February 2021, respectively. The Polish manufacturing PMI rose from 47.5 to 48.5. New orders and production continued to decline, but a slower rate while cost inflation shifted down notably.
