Markets
European equities on Friday rallied like there was no tomorrow. The Eurostoxx50 added more than a percent to finish the week at the highest level since the 00s. US indices including the S&P500 rose to a new record high but struggled in the aftermath before closing at virtually unchanged levels. US yields recovered intraday with strong income & spending data outweighing media headlines of an outdated PCE core deflator dropping sub 3% for the first time since 2021. Gains amounted up to 5.5 bps at the front. German yields added about 1.5 bps across the curve. The first ECB speeches since the policy meeting on Thursday from the likes of Simkus, Kazaks and Vujcic sounded more hawkish. Knot and Villeroy over the weekend weighed in as well. Both highlighted the importance of wage growth to adapt to slower inflation before cutting rates. The latter said a pace of 2.5% is needed for sustainable price stability. That compares to the latest figure of 5%. Balanced as ever, he did keep the door open for rate cuts “at any time this year”. EUR/USD whipsawed with stocks dictating the intraday moves. The pair eventually closed a tad higher in the mid 1.08/1.09 region. Sterling ended a strong week on softer footing, allowing a slight uptick in EUR/GBP to 0.854.
This week kicks off quietly with few data scheduled for release. That changes quickly though. European Q4 growth will be published tomorrow. Individual EU member states release January inflation figures tomorrow and Wednesday as an appetizer to the European reading on Thursday (seen at 2.7% from 2.9% headline and at 3.2% from 3.4% for the core gauge). The US gets a whole lot of attention as well. The Fed gathers on Wednesday and will have a most recent update on the Employment Cost Index at its disposal just a few hours before making the decision public. Powell didn’t make much of bond correction (higher) in the run-up to the December policy meeting. Markets since then priced in one more additional rate cut for 2024, bringing the total at 135 bps starting in May. Powell probably won’t alter current market sentiment. The economy is holding up very well but inflation is evolving favourably as well. The Fed chair against that background probably isn’t in the mood for being outright hawkish. We think that anything bar the latter will prolong the dovish tide in markets. Following the Fed meeting, the US manufacturing ISM is due on Thursday with payrolls on Friday ending a busy week. We are also on the lookout for the Bank of England gathering this Thursday. Bailey sounded more hawkish than Powell in December and the recent CPI uptick gave no reason to change that tone.
News & Views
The Financial Times reports that according to a document drawn up by EU officials, Brussels is preparing a strategy to convince Hungary into supporting the use of the EU budget to provide €50bn in financial aid to Ukraine. If Hungarian PM Orban doesn’t back down on its verbal threat to block the support at Thursday’s Summit, other EU leaders should publicly vow to permanently shut off all EU funding to Budapest. The document point out that without this EU money; “financial markets and European and international companies might be less interested to invest in Hungary which could quickly trigger a further increase in the cost of funding of the public deficit and a drop in the currency.” It’s unseen that the EU wants to target and exploit economic vulnerabilities of a member state (“very high public deficit”, “very high inflation”, “highest debt servicing payments as a % of GDP”…) in order to strongarm it into a decision. Hungary’s EU Minister Boka said that his country will continue to participate constructively in the negotiations. The forint is already sliding in illiquid Asian dealings (EUR/HUF 388; weakest HUF since October) with more weakness likely during European trading hours.
Oil prices spiked to their highest levels since early November 2023 this morning on reports that three US service members were killed and at least 34 were injured in an Iran-backed militia’s drone strike on a base in northeast Jordan. It marks another escalation in region apart from the Hamas-Israeli conflict in Gaza and the Houthi-backed attacks in the Red Sea. Brent crude currently trades around $84/b, coming from $79/b only a week ago.
