Markets
At the hearing before the Senate Banking Committee, Fed Chair Powell repeated that inflation in the core goods sector has fallen while housing services prices are also decelerating. Still, there is little sign of disinflation in core services excluding housing. Wages also remain above what is consistent with 2% inflation. As recent data were stronger than expected, the Fed Chair now guides that the ultimate level of interest rates is likely to be higher than previously anticipated. In addition, if data were to indicate that faster tightening is warranted, the Fed is prepared to increase the pace of rate hikes. Translating this into a concrete policy strategy/outlook: the March Fed dots probably will show that an important part of the FOMC advocates a final policy rate in the 5.5%/6% corridor and the Fed is likely to revert to a 50 bps hike in March, unless Friday’s payrolls and next week’s February CPI inflation would show an outsized downside surprise. The market reaction was a textbook one. The US yield curve inverted further with the 2-y jumping 12.8 bps, settling north of 5%. The 30-y declined 2.1 bps. Markets now see a 2 in 3 chance of a 50 bps step this month. Contrary to what was the sometimes the case of late, the real yield (10-y) this time jumped more than 10 bps while inflation expectations declined almost equally. This also didn’t pass unnoticed in other markets. US equities lost up to 1.72% (Dow). Cyclical commodities (oil, copper) also nosedived (Brent $83.3/b). The dollar profited from generous additional (real) interest rate support. DXY left the low 104 area, surpassed first resistance at 105.35 to close almost exactly at the 105.63 YTD top. EUR/USD (close 1.0546) finished only a whisker away from the 1.0533 February low. Smaller currencies (AUD, NZD, SEK, NOK) suffered substantial losses. CE currencies (HUF, CZK, PLN) again showed quite resilient. Sterling underperformed the euro as BoE’s Mann ‘warned’ on the risk of a further sterling depreciation. EUR/GBP regained the 0.89 handle. German yields lost between 0.4 bps (2-y) and 5.7 bps (10-y) but still have some catching up to do this morning.
Asian markets (ex-Japan) join yesterday’s risk-off positioning on WS. US (ST) yields are continuing their march higher (2-y + 5 bps) and so does the dollar (DXY 105.75; EUR/USD 1.0535; USD/JPY 137.67). Later today, the calendar is modestly interesting. A solid US ADP labour market report and persistently high JOLTS job openings already might further cement the case for a 50 bps Fed hike in March with further upside pressure at the short end of the curve. From a credibility point of view, it also raises the odds to continue hiking by 50 bps in May. The US Treasury today sells $42 bn of 10-y bonds. Even as the curve inverts further, the US 10-y yield tries to regain the 4% handle with the ST top at 4.09% the last barrier before a return to the 4.33% cycle top. Also keep an eye at the Fed Beige Book preparing the March 22 meeting. The dollar now is again in the driver’s seat. EUR/USD breaking below 1.0533, opens the way to the 1.0484/1.0461 area (YTD low/38 retracement Sept/Febr. rally).
News and views
The European Commission will publish its fiscal guidance for 2024 today. The plan is to return to the one-size-fitsall debt reduction rules that were suspended following the pandemic and the Russian invasion, an official familiar with the matter said. However, EU member states want the rules changed to better reflect the challenges of high public debt and the need for investment. Until a negotiated solution is reached later this year, the Commission is likely to propose that, for now, governments set their own targets for the next three years. The key premise is ensuring that the public debt ratio is on a downward path or that it remains at a prudent level and that the deficit is below 3% of GDP over the medium term.
One of the two MPC members that joined the Czech National Bank in mid-February, Kubicek, in his first interview said having rates at 7% should be enough to bring down inflation. He did say it was conditional on the absence of new shocks, including fundamental wage acceleration or crown weakening. Kubicek also favours keeping the rates at 7% for longer rather than follow the CNB’s model which proposes to lift rates to 8% and then reduce them towards 5%. Inflation hit 17.5% y/y in January, around a three-decade high. Helping the fight against inflation is the strong CZK. Although having retreated a little bit over the past few days, it is still trading at the strongest levels in 15 years (EUR/CZK 23.56 currently).
