Markets
European bond markets still opened stronger in the wake of yesterday’s unconvincing press conference by ECB President Lagarde. The move lacked momentum though with first individual ECB members sounding more hawkish than Lagarde did. We must admit that it weren’t the most high-profile representatives though. Latvian ECB Kazaks admits that rates should start to go down, but that the central bank should be in no rush whatsoever to start the process. From a risk-reward point of view, he warns against starting too fast because of the inflationary risk that it entails. Lithuanian ECB Simkus joined the chorus, saying he’s open-minded on a 2024 rate cut but suggesting that market pricing of an April move is too optimistic. Croat ECB Vujcic pointed out that markets are taking whatever the ECB is saying as being dovish even as (in his view) the underlying message didn’t change. Finally Slovenian ECB Vasle warned that that wage growth currently remains significantly above what would be consistent with 2% inflation in the medium term. Core bonds reversed opening gains to currently trade near opening levels. German yields add up to 1.5 bps today. US treasuries underperform, with part of the move coming after some volatility around today’s sole eco releases. PCE December deflators were nearly bang in line with forecasts, but could have been derived from yesterday GDP release. Media headlines centered around the core deflator’s first Y/Y print below 3% since March 2021. Markets had more eye though to personal income (0.3% M/M) and especially spending (0.7% M/M) figures. The dollar failed to profit from the relative yield dynamics as they were once again countered by extremely bullish risk sentiment on stock markets. Good corporate earnings offer part of the explanation together with central bankers reluctance to push hard against market pricing. The EuroStoxx50 adds another 1% to reach its highest level since 2001! From now, the market countdown starts to next week’s FOMC meeting. We don’t expect that to change post-ECB dynamics.
News & Views
German GFK consumer confidence declined sharply at the start of the year. In the forecast for February the overall index dropped 4.3 points to -29.7, the lowest since March 2023. In its press release, GFK states that both economic and income expectations as well as the willingness to buy are showing noticeable declines. GFK sees the rebound in inflation in December as a possible reason for the sharp decline in income expectations and buying intentions. The return to the regular 19 %VAT rate in the gastronomy industry and the increase in the CO2 tax for energy will probably boost prices and further weaken income expectations. Ongoing higher prices for essentials like food and energy reduce the planning security that is needed to make lager purchases. The significant decline in consumer sentiment also translates in a noticeable increase in willingness to save. This subindex rose to the highest level since 2008. The expectations on consumers’ individual situation occur in a context of growing pessimism on the future path of the economy as economic expectations dropped to the lowest level since December 2022. The German Bundesbank added to the negative news on the country as it sees the economy preforming (slightly) worse than previously expected. The economic rebound will be delayed, amongst other as sings that industrial foreign demand had already reached its lowest point weren’t confirmed. The delay in the recovery puts the 0.4% 2024 growth forecast at risk. For Q1, the Buba sees stagnation at best.
In the ECB’s Q1 Survey of Professional Forecasters (SPF), respondents revised down their expectations for HICP headline inflation to 2.4% in 2024 (-0.3%) and to 2% in both 2025 (-0.1%) and 2026. The downward revisions reportedly reflected the impact of lower than previously expected HICP data outturns and oil prices as well as weaker economic activity. Core HICP inflation, which excludes energy and food, was also revised down for 2024 (-0.3% to 2.6%) to and 2025 (-0.1% to 2.%). Longer-term expectations for both core end headline HICP were seen at 2%. Expectations for real GDP growth were revised down to 0.6% in 2024 (-0.3%), 1.3% in 2025 (-0.2%) and set at 1.4% in 2026. Respondents expected a slight contraction in real GDP in the final quarter of 2023, followed by a slow recovery of economic activity throughout 2024. Longer-term growth expectations remained unchanged at 1.3%.
