Markets
A quiet weekend, uninspiring overnight Asian dealings, an all but empty economic calendar & US financial markets closed for Presidents’ Day. Those are the poor cards European market were dealt with at the start of the week. It doesn’t come as a surprise, then, to see German yields, the euro and European equities basically flatline. We’ve expanded the New & Views section for the occasion.
News & Views
Headline inflation in Sweden printed at -0.1% M/M and 5.4% Y/Y up from 4.4% (vs 5.0% expected). The preferred measure of the Riksbank, CPIF inflation (fixed interest rate) showed a similar picture (0.3% monthly decline but rebounding from 2.3% Y/Y to 3.3% Y/Y). However, the rise in the Y/Y measure was driven by unfavourable base effects due to a sharp decline in energy prices last year. The Riksbank probably will draw comfort from a further decline in core CPIF inflation excluding energy (-0.5% M/M and 4.4% from 5.3% in December). Monthly details showed a drop in prices for clothing (-8.3%), fuels (-10.8 %), international flights (-23.7%), package holidays (-12.7%) and accommodation services (-4.2%). This was partially counterbalanced by higher electricity prices (5.7% M/M), rents for housing (2.1 %) and interest rate expenses/owner occupied housing costs (1.5%). In its latest monetary policy report (Nov 2023), the RB forecasted CPIF inflation ex energy at 4.5% Y/Y, with the measure expected to return to the low 2% area H2 2024. In the statement after the February decision, the RB indicated that rates could be cut be sooner than initially expected, maybe already in H1. In this respect, the June meeting is/was on the radar. But for that option to materialize, the Fed (and the ECB) probably should be able to start their easing cycle in June (or early) as well. This is less evident after last week’s US data. The Swedish krone gains marginally (EUR/SEK 11.23) but is holding in a ST consolidation pattern between 11.20 and 11.43.
The recent rather sharp weakening of the koruna apparently is becoming a factor of growing importance at least for some members of Czech National Bank MPC. In an interview with Szenamzpravy.cz published on the CNB website, vice Governor Eva Zamrazilova indicated that if the exchange rate remains weaker than the levels expected by the CNB for the medium or longer term, it will have to cut rates at a slower pace. Czech January inflation last week expectedly printed at 1.5% M/M and 2.3% Y/Y (3.0% was expected by the CNB). This sharp slowdown in inflation further raised speculation that the CNB might step up the pace of rate cuts from 50 bps to 75 bps, especially as inflation might drop below the 2.0% target later this year. Last week, governor Michl already argued that while the CNB restored price stability, ongoing high core inflation, a high public deficit and a weaker-than-expected koruna are good arguments for the CNB to lower interest rates only cautiously. In this respect, the bar for 75 bps steps probably remains high. At EUR/CZK 25.45, the koruna is holding near the weakest levels since March 2022.
French Finance Minister Le Maire yesterday brought some bad news regarding the EU’s second-largest economy, lowering this year’s growth forecast to a meagre 1%. Germany’s Bundesbank today issued a similarly depressing message about Europe’s N° 1. Its monthly report projected another economic contraction in the first three months of the year. With the economy having shrunk 0.3% in 2023Q4 it would put Germany in a technical recession. The Bundesbank blamed several factors including uncertainty over fiscal policy since the constitutional court ruling banning the use of off-budget financing vehicles caused a budgetary shockwave reaching in the tens of billions. Economy Minister Habeck last week said this will cripple growth in the updated forecasts (due Wednesday) to just 0.2% this year. The BuBa also highlighted ongoing weak domestic and foreign demand, production hit by train and airport strikes, depleting order books in the industry and construction & dampened investments amid higher borrowing costs. However, the economy should gain traction later this year against the background of a stable labour market and (real) wages rising sharply. The dire message comes ahead of the February PMI’s later this week. These forward looking indicators are projected to still signal an economic contraction (<50) but to improve marginally, extending (manufacturing, from 45.5 to 46) or initiating (47.7 to 48) a bottoming out process, be it an extremely gradual one.
