Markets
Today’s very first March inflation update – honor to the German North Rhine Westphalia region – set the tone for the start of European dealings. The regional figure printed softer than what was expected for the national number, suggesting a downward surprise. Soon after, Spanish inflation rose 1.1% M/M while markets expected a 1.6% M/M gain. The Spanish statistics agency didn’t provide much info yet, but said that energy prices fell in March. The Y/Y-figure nearly halved, from 6% to 3.1% , mainly due to a giant negative base effect stemming from last year’s surge in energy and road fuel prices after Russia invaded Ukraine. The combination of both triggered early buying in German Bunds, temporarily ending this week’s slide. The obvious reflex being that it provides an argument for the ECB not to aggressively push through with its flagged additional rate hikes. Markets initially easily looked past the fact that Spanish core CPI remained stubbornly high at 7.5% Y/Y (from 7.6% Y/Y). As more and more German States printed inflation numbers, it became clear that the story wouldn’t be as straightforward. German Bunds returned towards opening levels and currently trade even weaker as the overall German inflation number beat consensus! Headline German inflation accelerated to 1.1% M/M (vs 0.8% expected) with the Y/Y-figure falling somewhat less than hoped (from 9.3% Y/Y to 7.8% Y/Y). Belgian core inflation (see below) remains on an upward trend as well. German yields currently add 10.7 bps (2-yr) to 1 bp (30-yr). Money markets are again embracing two additional 25 bps rate hikes this year whereas this was only one last week around. Despite this ongoing repositioning, we still think it’s too conservative. German Bunds underperformed US Treasuries today with US yields gaining “only” 4 bps at the front end. The single currency benefited from the yield advantage with EUR/USD pushing for a test of the March high at 1.0930. It’s final resistance ahead of the YTD top at 1.1033. Positive risk momentum helped the single currency as well with main European indices adding another 1% to their rebound and US gauges opening 0.5% higher. The EuroStoxx50 is closing in on this year’s high at 4324.25. ECB board member Schnabel said yesterday after market close that European banks haven’t seen a general deposit outflow.
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Belgian inflation rose by 0.57% to be 6.67% y/y in March. It’s the first yearly acceleration since prices started easing from their peak at 12.30% in October 2022. Food prices were a major contributor. By rising 17.02% (up from 16.12% last month), 3.12 ppts to the headline figure were added. Energy prices weighed heavily on the index, subtracting 1.49 ppts from the figure. On a yearly basis, energy prices dropped 10.11% y/y compared to 7.93% last month with especially gas prices recording a steep fall after surging in the same month last year (-45.6% y/y, -17.6% m/m). Core inflation continued to speed up, from 8.28% to 8.57%. Services inflation also rose further, from 6.96% to 7.06%, suggesting still wide-spread and strong underlying price pressures.
The Swiss KOF Economic Institute’s economic barometer fell marginally in March. The headline index lost 0.7 points in March from 98.9 (revised from 100.0). At 98.2, it printed just below its average value of 100. So the upward trend observed between November 2022 and last month came to a halt. The KOF Institute reported negative signals from the manufacturing, services and construction sectors. They are at least partly offset by positive developments in the indicator bundle reflecting Swiss exports. Other indicators included in the barometer were reported as little changed. In manufacturing and construction, the situation referring to employment and inventories is assessed more negatively than before, while new orders and intermediate goods have improved. The KOF Institute concludes that obstacles to production are still primarily due to recruitment problems in the labour market. EUR/CHF after the release trades little changed near 0.996. Recent financial turmoil also had only a temporary impact on the franc. In a broader perspective, the EUR/USD cross rate is holding a rather tight range near parity. The SNB at last week’s policy meeting, indicated that it is prepared to sell FX/buy the Swiss franc to support appropriate monetary conditions.
