Markets
German inflation joined the French and Spanish example by surprising to the upside. It again was key for the European trading session with German yields surging another 4.4-7.6 bps across the curve to close at new cycle highs. In doing so, the 10y yield (2.71%) added conviction to Tuesday’s break above the 2.57% resistance level. European swap yields added 3.2-7.7 bps with the 10y reference leaving the neckline (3.20%) of the double bottom (troughs set at 2.5%) further behind. US yields shifted 3.8-8.1 bps in a similar fashion. The 10y yield tested the 4% barrier for the first time since November. The move higher followed the one in Europe initially and then went further autonomously after the US manufacturing ISM. The headline series came in slightly below consensus (47.7 vs 48) but nevertheless broke an 8-month long decline. In addition, the prices paid gauge ticked up more than expected, from 44.5 to 51.3, suggesting that prices in the sector are picking up again instead of vice versa. The yield advance on both sides of the Atlantic was driven by inflation expectations even though we had some hawkish comments from the likes of ECB’s Nagel and Villeroy and Fed’s Bostic (rates need to be raised above 5% and stay there “well into 2024”). Equities in Europe swapped 0.9% gains for a 0.5% loss (Euro Stoxx 50). WS finished with similar losses (S&P, Nasdaq). The dollar didn’t profit from the sentiment turnaround though. EUR/USD rebounded from 1.0576 to 1.0668 helped by a stronger euro too. The pair tested the 1.068 resistance. DXY retreated from north of 105 to 104.48. Sterling tanked amid UK gilt outperformance. EUR/GBP visited resistance located around 0.89 but closed at 0.887 eventually, up from 0.8798. Bank of England governor Bailey “would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more”. Given current market sentiment, his balanced tone stood out. At some point short-term gilt yields dived 11 bps lower. Damage in the end stayed limited to 3.1 bps at the front end of the curve.
We’re skipping a dull Asian trading session and go straight to the economic calendar for today. Central bank speeches and the ECB meeting minutes are worth their while but actual attention goes to European inflation number. The headline figure is expected to ease from 8.6% to 8.3% (0.5% m/m). Core inflation would equal January’s 5.3%. Giving the national prints earlier this week, risks are tilted to the upside. We expect core bonds to stay under pressure. From a technical perspective, German yields have little resistance to forge ahead. European swap yields with longer maturities have yet to surpass their previous cycle highs. In the 10y we keep a close eye at the 3.408% level (October intraday cycle high). Until now equities remain resilient as higher yields were at least partially driven by inflation expectations rather than real yields. If this changes, the dollar might again benefit. EUR/USD 1.0735 remains a meaningful resistance on the charts, followed by 1.0806.
News and views
The South Korean manufacturing PMI stabilized at 48.5 in February with details pointing to further contractions in both output (10th month in a row) and new orders (8th month in a row) amid dampened global economic conditions and sustained price pressures commonly linked to exchange rate weaknesses. Input price inflation nevertheless eased to its softest reading since November 2020. Backlogs of work fell at the sharpest pace in just over two-and-a-half years with the employment component back below the 50 breakeven mark. Inventories of finished items rose at the greatest extent since November 2017. On a bright note, confidence about the future strengthened across the sector amid hopes of improved domestic and international demand conditions. January South Korean industrial production data, released this morning as well, increased for the first time since June (2.9% M/M). In Y/Y-terms, production is down 12.7%.
The Australian Bureau of Statistics reported a 27.6% M/M decline (most on record) in total building approvals in January. Approvals for private sector houses fell by 13.8%, the fifth consecutive drop, to be the lowest result recorded since June 2012. High borrowing costs, surging construction costs (shortages of material and labour) and an unwinding of pandemic-related government subsidies are all at play. AUD is again somewhat weaker this morning with AUD/USD eyeing the recent low at 0.67.
