Markets
EMU February CPI data logically summarized/confirmed evidence from national data. At 0.8% M/M and 8.5% Y/Y, EMU headline inflation ‘slowed’ (8.6% in January) far less than hoped for. Core inflation even set a new high, rising from 5.3% to 5.6%. In the run-up to the CPI release, ECB Lagarde already reiterated that the ECB will be as tight as necessary to arrest inflation. German yields trended higher in the run-up to the CPI, but fell prey to a mild ‘ buy-to-rumour, sell-the-fact’ reaction afterwards. Minutes of the February ECB meeting didn’t bring much news for markets. Sticky inflation justifies the ECB’s ‘higher for longer approach’ and there is no risk of overtightening yet. At the same time, some (dovish) ECB governors warned to be cautions to focus too much on core inflation. At least for now, this concern isn’t confirmed by the data. In this respect, ECB’s Wunsch said that if underlying prices pressures stay elevated, ‘looking at rates of 4% would not be excluded’. German yields closed the session between 1.1 bp (2-y) and 4.7 bps higher. US eco data at first looked second tier. Weekly jobless claims again printed at a very low 190k, confirming a persistent tight labour market. Remarkably, US yields jumped a few bps higher on an what normally would be considered an ‘outdated’ upward revision of Q4 unit labour cost data (3.2% from 1.6% initially). In a steepening move, US yields closed the session between 0.9 bps (2-y) and 6.3 bps (10-y) higher. Intraday, also the 30-y temporary jumped above 4%. The rise in LT US yields was again mainly driven by higher inflation expectations rather than by real yields. Fed governors Bostic and Waller reconfirmed a data dependent approach, meaning that they are prepared to raise the policy rate beyond the December dots if inflation and labour market data continue to hold stronger/higher than envisaged earlier. The mild rise in real yields still gives some comfort to equity investors. The EuroStoxx 50 overcame an earlier loss of about 0.8% to close 0.6% in green. US indices gained between 0.73% (Nasdaq) and 1.05% (Dow). The dollar this time rebounded despite a constructive equity sentiment. DXY closed just below the 105 mark (open about 104.40). The post CPI ‘easing’ on European yield markets at the same time also triggered some euro profit taking. EUR/USD dropped from an open near 1.0665 to close near 1.06. In technical trading, EUR/GBP held a very tight sideways range in the upper half of the 0.88 big figure.
Asian equities join the positive mood on WS yesterday evening, with the Nikkei outperforming. The dollar eases slightly after yesterday’s rebound. US Treasuries gain marginally. Later today, the market focus will be on the US services ISM. Together with next week’s payrolls and the US CPI (14 March), this will be a last important input for the March 22 Fed meeting as services inflation is a key factor in the Fed’s policy assessment. A mild easing to a still solid 54.5 (from 55.2) is expected. After the recent protracted rise in yields, a substantial upside surprise is probably needed to trigger a further upleg in US yields. Nevertheless the trend remains firmly in place. Aside from the CPI data, plenty of ECB and Fed governors speak. If risk sentiment remains constructive, the dollar might cede some further ground. However we would be surprise to see EUR/USD break out of the 1.06/1.07 ST consolidation pattern.
News Headlines
Headline Tokyo inflation slowed from 4.4% Y/Y to 3.4% Y/Y in February with government subsidies for electricity and utilities being responsible for this significant slowdown. This becomes most visible in the CPI metric excluding fresh food and energy costs, which accelerated from 3% Y/Y to 3.2% Y/Y, the highest level since the early ‘90s. It shows evidence of still rising prices for processed food and for consumer durables and suggests a strong underlying (core) inflation trend. It will be interesting to see in coming weeks whether BoJ governor-nominee Ueda hides behind the drop in headline inflation or picks up the baton against strong core inflation. Today’s Japanese labour market data showed the jobless rate falling from 2.5% to 2.4% in January with the job-to-applicant ratio marginally lower at 1.35 from 1.36. The Japanese yen holds near weakest levels since the start of the year with USD/JPY trying to take out 136.67 resistance (38% retracement on October to January decline).
