Markets
ECB president Lagarde immediately set the tone for trading in a Bloomberg interview at the World Economic Forum in Davos. She repeated that the ECB is watching wages, profit margins, energy prices and supply chains over the next months before firmly concluding that inflation is on a sustained path towards the central bank’s 2% inflation target. Short of any major shock, ECB policy rates have peaked with the next move being a rate cut. On the timing, she joined other ECB members who recently pushed back against aggressive market pricing on both rapid and plenty of policy rate decreases this year. Lagarde suggested that a first move lower is only likely by the Summer. This year’s two ECB Summer policy meetings are July 18 and September 12. A July rate cut would symbolically come exactly two years after the first policy rate increase while a September cut would mean that the ECB’s key rate was at its 4% peak for exactly one year. While investors reduced early easing bets, they still discount a cumulative 50 bps of rate cuts by the June 6 policy meeting completely ignoring recent guidance. By the first Summer meeting in July, this increases to a cumulative 75 bps! The Lagarde comments triggered a soft opening for German Bunds with the front end of the curve underperforming. German yields currently add up to 7.2 bps (2-yr).
And yet US Treasuries and UK Gilts sell off even more intensely today… US yields add 2 bps (30-yr) to 11.1 bps (2-yr). Apart from the echo of yesterday’s Fed Waller comments, markets were served consensus-beating December US retail sales. The headline figure rose by 0.6% M/M (vs 0.8% consensus) with the control group (used as a proxy for consumption in GDP calculations) even adding 0.8% M/M following an upwardly revised 0.5% M/M in November and rounding another good quarter. UK Gilt yields even surge 9 bps (30-yr) to 17.5 bps (3-yr) today following December UK inflation figures. Inflation accelerated by 0.4% M/M (vs 0.2% consensus), pushing the headline figure to 4% Y/Y (vs 3.8% expected). Both core inflation (unchanged at 5.1%) and services inflation (6.4% from 6.3%) beat consensus as well. Today’s inflation print significantly limits the Bank of England’s room to prioritize growth over the ongoing inflation battle. Sterling initially profited from the interest rate support (EUR/GBP 0.8575 from 0.8610) but can’t build on those gains. EUR/USD extends its move south (1.0860) with the Japanese yen back under huge selling pressure (USD/JPY 148). European stock markets cede over 1% with WS opening up to 1.2% lower (Nasdaq).
News & Views
The president of the Swiss National Bank told Bloomberg that the recent strengthening of the Swiss franc has been significant enough so that it affects the inflation outlook. The central bank will take that into account at the next policy meeting on March 21. At the latest December meeting, the SNB shifted to a more neutral approach by no longer keeping the door for rate hikes formally open and making the FX intervention threat bidirectional again instead of focusing on CHF sales. Its inflation forecast showed inflation not above 2% for the entire horizon and Jordan told Bloomberg at the time that “In three months, we will look very carefully at the new forecast” and that “Depending the situation, we will adapt monetary policy.” If the outlook now gets revised downward again in March because of the (real) CHF appreciation, the SNB may pivot further towards rate cuts. A first full rate cut is priced in for June but odds for a March move rose after Jordan’s speech. The Swiss franc loses ground as a result. EUR/CHF rises above 0.94 and, by doing so, recovers previously lost support.
When the deputy governor of the Hungarian central bank speaks, the forint listens. Virag in Q4 last year guided the market towards several 75 bps rate cuts through early 2024. In December they nevertheless already discussed the option of moving ahead with a 100 bps move before eventually sticking to the original pace. However, with inflation figures coming in more favourable than expected, the deputy governor today said room for a 100 bps cut has grown and they’ll consider the possibility again at the January 30 meeting. If that were to happen, it would be only temporary, say one to three months. By mid-2024, Virag said the key rate could drop to around 6-7% from 10.75% today. The Hungarian central bank meets on a monthly basis. The forint dropped on Virag’s comments. EUR/HUF topped 380 before moving further to 381.25 currently. Hungarian swap yields dropped 14 bps intraday at the front before recovering again, joining the trend in global core bond markets.
