Markets
ECB members came out “en masse” today, resembling the recent push by the US central bank. Hawkish Austrian ECB Holzmann immediately pulled an interesting string. He supports our “sequence” call, stressing that he didn’t see any circumstances for the ECB to cut policy rates before the Fed. We’re on the same line, arguing that the ECB won’t risk a weaker currency by moving ahead of the FOMC. Its credibility and especially inflation goal are at stake if the central bank risks taking the first leap while inflation is still running above the 2% inflation target. Given that Fed members are openly pushing back first rate cuts bets to the June meeting (at best), it implies that the window of opportunity for the ECB only opens at the July meeting, our preferred scenario. Holzmann continued by preferring a later but faster cycle compared to a rapid start with gentle moves lower. The main argument for erring on the hawkish side of expectations is the persistence of elevated wage pressure. Shorty after the Holzmann comments, the ECB published consumer survey inflation expectations for January. They slightly increased on the 1-yr horizon (3.3% from 3.2%) while keeping level on the 3-yr tenor (2.5%). ECB Schnabel lined up next, arguing that internal models suggest that the peak impact from interest increases may already be over. This again argues in favour of keeping policy rates higher for longer with inflation sticky above target and EMU growth set to recover from last year’s standstill. Bundesbank president Nagel added to the hawkish rhetoric by saying that officials mustn’t be tempted to cut rates earlier as the inflation outlook isn’t clear enough yet. He’s more comfortable with current market pricing (first move in June; max 100 bps of cuts this year) compared with say a month ago (start in April and cumulative 150 bps of cuts in 2024). Premature cuts could result in the worse outcome, reigniting inflation when it hasn’t actually been conquered. ECB President Lagarde underlined the importance of Q1 wage data which will only be at the central bank’s disposal by the June policy meeting. Lithuanian ECB Simkus is happy with Lagarde’s guidance of a first rate cut in “summer” while dovish Greek ECB member Stournaras is more precise, singling out the June meeting as his preferred kick-off point.
ECB rhetoric failed to inspire trading in an uneventful session. German Bund yields currently give up around 3 bps after setting YTD highs yesterday. Changes on the US yield curve are more modest, varying between +1 bp and -1 bp. EUR/USD treads water at 1.0830 with European stock markets slightly benefiting from yesterday’s WS momentum (EuroStoxx +0.4%;new cycle high).
News & Views
French finance minister Le Maire called for action in the creation of a Capital Markets Union (CMU). In his pitch before his European colleagues he noted the project has dragged on for a decade but that high financing needs for the green and digital overhaul underscore the need. France and Germany estimate these costs at some €500bn a year, which may be difficult to finance through public funds only. The many different financial systems and legal settings in the 27 EU countries make it very challenging to create the CMU. That’s why Le Maire suggests to kick off the project on a voluntary basis, beginning with three to four (unspecified) countries. His proposal would entail the submission to single EU supervision of banks, stock exchanges and asset management as well as the creation of a European savings product.
Belgian business confidence improved in February from -16.4 to -12.8. Doing so, the NBB’s company gauge reversed the setback from January with better readings across all sector. The smoothed series, indicating the underlying economic trend, increased only slightly but that does bring an end to the downward path in place since last May. Trade (from -17.8 to -11.9) posted the sharpest recovery on better forecasts for orders to be placed with suppliers, in response to growing demand expectations. Business-related services sector confidence (+9.1 from +4.6) was shored up by all sub indicators, from the assessment on current and expected activity to anticipated demand. Manufacturing (-18.5 vs. -22) also responded more favourably on all accounts with the biggest improvement seen in future demand. The upturn in confidence was the smallest in the building industry (-10.3 from -12.8).
