Markets
The reaction to strong data UK labour data yesterday was mainly confined to underperformance of UK gilts and an unconvincing attempt of sterling to profit from a rising interest rate support. With few other data or eco news in the US and Europe, the impact of higher than expected UK price data this time also left its traces outside the UK. The monthly dynamics of headline inflation hardly slowed (0.8% M/M from 1.1%) keeping the Y/Y measure north of 10% (10.1% from 10.4% vs 9.8% expected). The rise was still broad-based with subcategories food, alcohol & tobacco, clothing & footwear, household goods, recreation and restaurants & hotels all showing a monthly rise of 1.0%+. Core inflation was unchanged at 6.2%. So, the cycle peak reached in autumn last year (6.5%) still isn’t that far behind. In the March policy statement, the BoE made further tightening conditional on evidence of more persistent inflationary pressures, ‘including the tightness of labour market conditions and behaviour of wage growth and services inflation’. After yesterday’s and today’s data, this condition is (more than) fulfilled. A May 11 rate hike is now fully discounted an markets see the BoE peak cycle policy rate close to 5.0% in September. UK government bond yields add between 10 bps (2-y) and 7.0bps (30-y) (was more intraday). Sterling strengthened below EUR/GBP 0.88 after the release, but again still struggles to hold on to these gains (currently near 0.8805). The UK data also provided a reality check for global (interest rate) markets. US yields add between 4.5 bps (2-y) and 2 bps (30-y), with key resistance at 4.26% (2y) and 3.64% now under test intraday. German yields in a similar move are rising between 5.4 bps (2-y) and 1.6 bps (30-y). The prospect a further/long-lasting tightening also dampened stock market sentiment, but for now losses remain contained (Euro Stoxx 50 -0.2%). Higher core yields and a hesitant risk sentiment slightly favour the dollar. DXY trades near 101.90 from 101.70 this morning. EUR/USD slipped from the 1.0970/80 area this morning to current currently trade near 1.095. Even gains in USD/JPY (134.4) stay modest. Among the smaller currencies, underperformance of the Canadian dollar (USD/CAD 1.343) and the Norwegian krone (EUR/NOK 11.55) is catching the eye as oil dropped from near $85 p/b to the low $83 area.
In central Europe, the forint at some point ceded about 2.0%. Vice governor Virag of the Hungarian central bank (MNB) overnight in an interview signaled that recent improvement in sentiment opened the way to start policy normalization. The multi-step move might already include a reduction in the top of the rate corridor (currently 25%) next week. A reduction in the key 18% deposit rate can be put on the agenda of subsequent policy meeting. Inflation in Hungary still printed at 25.2% Y/Y in March but Vice governor Virag indicated this was expected and still expects a sharp disinflation later this year. At EUR/HUF 376 the forint currently recouped part of the early losses.
News & Views
Swiss National Bank governing board member Maechler commented on the central bank’s latest inflation forecasts (March 23). “We use the conditional inflation forecast as an important communication tool. Even with our last 50 bps rate hike, we only get down to exactly 2% by the end of the forecasting horizon (2025)”. It signals that another rate increase at the June 22 policy meeting will be needed to bring inflation fully under control. SNB chair Jordan last Friday also suggested that more tightening is possible. SNB vice-chair Schlegel is scheduled to speak after European close tonight. The Swiss franc doesn’t move today with EUR/CHF trading around 0.9830. The SNB warned in March that it is actively preventing the currency from becoming too weak as it interferes with actions taken via policy rates to achieve a tighter monetary framework and curb inflation.
Bloomberg cites sources close to the Bank of Japan in an article suggesting that the first meeting under new governor Ueda won’t bring any changes (to yield curve control) so soon after the banking crisis overseas which clouded the economic outlook. There’s a preference to keep current yield caps in place to support the economy while buying some more time on how inflation’s behaving. BoJ governor Ueda in an earlier appearance before parliament also hinted to a preference to stick with current monetary policy settings for the time being. JPY was losing ground against the dollar, touching the psychologic 135 barrier. The move didn’t persist with the greenback coming under pressure as the US trading session got started.
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