Markets:
ECB members hit the wire today. ECB Wunsch started off by saying that rates of 4% would not be excluded if the central bank doesn’t get clear signals that core inflation is going down. ECB Vasle followed by talking about additional increases (plural) after the flagged 50 bps March rate hike. Vice-governor de Guindos stuck with formal guidance that the interest rate path after March will be data-dependent. He stressed that the new forecasts on underlying inflation will be very, very important. Recall in this respect yesterday’s unexpected surge in core CPI from 5.3% Y/Y to 5.6% Y/Y, a new EMU record high. ECB Muller is worried about core inflation as well and repeated hesitation now may require more action later on. The overall tone of ECB comments suggests that the ECB at its March 16 policy meeting will signal to stick to its 50 bps rate hike pace in May as well. Such scenario is almost completely discounted in European money markets following fierce February repositioning. We stick to our view that policy rates will peak at at least 4% later this year. Today’s ECB comments didn’t trigger a fresh sell-off though. Ahead of the weekend, investors decided to take some chips off the table during European trading hours, with German/EU yields correction a couple of basis points lower. This context helped stock markets to gains of 1%-1.5% in Europe with US markets opening around 0.5% higher. EUR/USD treaded water just above 1.06. EUR/GBP lost a few technically insignificant ticks, changing hands around 0.8850. From a European data point of view, there’s nothing big anymore ahead of the March 16 policy meeting. • The US services ISM was this week’s final key data release. The ISM stabilized at a strong 55.1 while consensus expected a small setback to 54.5. Details showed very strong new orders (62.6 from 60.4) with employment picking up forcefully from 50 to 54. Prices paid only decelerated marginally from 67.8 to 65.6. Business activity grew, but couldn’t keep up with the stellar pace in January (56.3 to 60.4). Overall, the ISM remains extremely strong, pointing to a tight labour market, resilient economy and continued price pressure. US Treasuries and stocks (to a lesser extent) spike lower on the release. EUR/USD tries to return sub 1.06.
News Headlines:
The FAO food price index in February extended its established downtrend, even as the decline this time was only marginal. The index eased 0.6 M/M from January, the eleventh consecutive monthly decline. The index has fallen 18.7% compared to the peak recorded in March 2022. The small February decline is the result of a significant drop in the subindices vegetable oils and dairy together with fractionally lower prices for meat and cereals, more than offsetting a steep rise in the sugar price index. Looking at the subindices, the cereal price index is now only 1.4% above the level one year ago. The vegetable oil price index dropped to the lowest level since the beginning of 2021 driven by continued weakness in prices across palm, soy, sunflower seed and rapeseed oils. The dairy price index stands 7.2% below the corresponding level of the same month last year. The index for meat eased 1.7% Y/Y. The sugar price index jumped 6.9% on a monthly basis reaching the highest level since February 2017. According the FAO, the rise in the sugar price in February was mostly related to deteriorating sugar production forecasts in India.
Turkish inflation eased further in February to 3.15% M/M and 55.18% Y/Y to be compared with 6.15% M/M and 57.68% Y/Y in January. It was the fourth consecutive decline in the Y/Y reading after reaching a peak north of 85% in October. The decline is for an important part due to base effects resulting from sharp monthly price rises end 2021 and in the first half of last year. In a monthly perspective, Turkey still reported price increases for food and non-alcoholic beverages (7.36% M/M), education (5.69%) and hotels, cafes and restaurants (4.07%). Core inflation also declined from 52.97% to 50,58%. Looking forward, question is whether this downtrend will persist considering a supportive fiscal policy to address the impact of the earthquake but also in the run-up to May elections. In addition monetary policy also stays extremely loose as the CBRT last week further reduced its policy rate from 9% to 8.50%. After touching a historic low against the single currency near EUR/TRY 20.78 last month, the lira regained modest ground currently holding near EUR/TRY 20.08.
