Sunset Market Commentary

Markets

The February European headline PMI came in slightly stronger than expected, rising from 47.9 to 48.9. A deepening contraction in Germany (46.1) and sustained output fall in France (47.7) were countered by faster growth in the rest of the region. There’s a split on a sector level as well. Manufacturing unexpectedly ventured deeper in contraction territory (46.1) with Germany (42.3) in particular clipping the wings of a fragile bottoming out process. New (export) orders fell sharply, weighing on output, employment and input buying & inventories. Expectations for the year ahead remain sub-par. Services activity on the other hand stopped contracting after six months (50). Growing employment compensated a (smaller than in January) decline of new orders. The future hasn’t looked as bright in 11 months. Talking prices, manufacturing disinflation contrasts with the sharpest services output inflation since 2000 if one takes out the exceptionally strong post-Covid price dynamics. Labour market tightness and rising wages are to blame. Markets looked through the manufacturing malaise and focused on the light at the end of the services tunnel. Euro area money markets pared ECB cutting bets to less than 100 bps for this year. The German yield curve turns more inverse with changes of +2.5 bps at the front and -3.3 bps further out. ECB minutes added some substance. Judging the disinflationary process as fragile and noting only limited indications for wages to have turned a corner, policymakers agreed that it was too soon to discuss rate cuts. The risk of lowering rates too early was still seen as outweighing that of cutting too late. While the March inflation forecasts would probably be revised downwards on lower energy prices, stubborn core inflation warranted a cautious approach. US yields joined the European example for once. Lower-than-expected jobless claims (yes, again) triggered additional gains. Net daily changes vary between flat (30-y) to +2.6 bps (2-y). UK gilts outperform global peers, losing up to 2.6 bps. This is even as the services (54.3) and composite PMI (53.3) surprised to the upside to settle more comfortably above the neutral level. However, the questionnaire revealed that much of the services upturn is driven “by resurgent demand for financial services, in turn predicated on hopes of an imminent pivot to rate cutting by the Bank of England.” The latter is not at all guaranteed given the higher inflation rate – guestimated at 4% – in the sector. Manufacturing, just as in Europe, keeps struggling (47.1). The euro on the currency market sprinted towards but never really attacked the EUR/USD 1.09 big figure following the PMIs. A stronger dollar in the wake of the jobless claims wiped out almost all of the remaining EUR/USD gains (flat). The Japanese yen is nearing recent lows against the dollar again. Sterling loses out against most major peers, including the euro. EUR/GBP is testing the February top around 0.857.

News & Views

The Central Bank of the Republic of Turkey (CBRT) today kept its policy rate unchanged after rising from 8.5% in May last year to 45% in January. It was the first meeting under the new governor Fatih Karahan. The statement takes notice that due to month specific and time-dependent price and wage adjustments, the underlying trend of monthly inflation rose in January. Headline inflation in January was 6.70% M/M and 64.86% Y/Y. Core inflation printed at 70.48 % Y/Y. The CBRT sees a moderation in domestic demand, but acknowledges that stickiness in services inflation, geopolitical risks and food prices keep inflation pressures alive. The Committee signals that current level of the policy rate will be maintained (or raised if needed) until there is a significant and sustained decline in the monthly trend of inflation and until inflation expectations converge to the projected range. The CBRT also sees a real appreciation of the lira contributing to the disinflation process. The CBRT aims at inflation of 5%. In its latest projection, the bank forecasted CPI at 36.4% end this year. At EUR/TRY 33.72 the lira still trades weaker in a daily perspective, but regained some losses from early this morning.

The ECB reported a 2023 loss of €1.266 mln (break-even in 2022). The de facto loss was even bigger as the ECB used an amount of €6.620 mln of provisions for financial risk. Having raised the policy rates, interest expenses on ECB liabilities carrying a variable rate also increased while interest income on its assets did not to the same extent. The ECB said it is likely to incur losses over the next few years. The loss has no impact on its ability to conduct effective monetary policy but did result in the ECB not distributing any profits to the euro area central banks for 2023.