Sunset Market Commentary

Markets:

Yesterday’s US data (shipments, durable goods orders, house prices, consumer confidence) was mixed and failed to given guidance for (bond) trading. (US) markets over the previous two months reverted to a more neutral positioning, putting themselves in line with the December Fed dots ‘guiding’ 75 bps of cumulative rate cuts by the end of the year. To really move away from this equilibrium, markets need hard news, but this wasn’t available today. US Q4 GDP was marginally downwardly revised (3.2% Q/Qa), but the core PCE price index printed slightly higher (2.1%). Still, this remains old news. Tomorrow’s US January PCE deflators and maybe even more the ISM’s (manufacturing on Friday, services on Tuesday) should provide more forward looking insights. US yields are changing less than 2 bps across the curve. A similar set-up for European interest rate markets: investors are counting down to tomorrow’s flash EMU CPI estimate. Favourable base effects compared to last year should result in a renewed decline (headline expected 0.6% M/M but the Y/Y measure easing from 2.9% to 2.5%, core expected at 2.9% Y/Y from 3.3%). Base effects for EMU CPI will remain favorable in March and April. However, the ECB will keep a close eye at the underlying (monthly) dynamics and at the potential impact of wage negotiations on inflation going forward. Soft EC confidence data (economic confidence down from 96.1 to 95.4) published today at least suggest that sentiment doesn’t call for wage exuberance. In technical trading, German yields soften less than 1 bp. Markets still pinpoint the first ECB rate cut at the June meeting. Equities ease marginally but stay near recent peak levels (EuroStoxx -0.15%, S&P -0.35%). Oil is drifting higher (Brent $84/b) as markets are pondering headlines that OPEC+ will (have to) extend voluntary production. On FX, the dollar gains modestly without changing the (neutral) technical set-up. DXY regains the 104 barrier (open 103.81). USD/JPY (150.7) gains marginally, with the February top (150.89) and the cycle multi-year peak levels (151.91/95) again within reach. The euro underperformed, especially this morning, as EUR/USD quickly dropped to test bids just below 1.08. We didn’t see an unequivocal trigger. Were negative comments from Russian officials on French President Macron’s idea to potentially deploy NATO troops in Ukraine in play? Whatever the driver, EUR/USD gradually recouped part of the initial loss to currently trade near 1.0825. Sterling still underperforms a soft euro, with EUR/GBP changing hands near 0.856.

News & Views:

Belgian inflation accelerated to 0.71% M/M in February with Y/Y-inflation increasing from 1.75% to 3.20%, the highest level since August of last year. Energy inflation is negative since February 2023 but now stands at -5.34% Y/Y from -22.30% Y/Y in January. Food inflation (including alcoholic beverages) has decreased for the 11th month in a row and now stands at 4.65% from 6.58%. Core inflation, which does not take into account price evolutions of energy products and unprocessed food, has decreased for the 9th month in a row and now stands at 4.25% from 4.70% in January. Services inflation decreased to 4.92% from 5.15% and rent inflation to 5.72% from 5.91%. The first inflation estimate according to the European harmonised index of consumer prices (HICP flash estimate) for Belgium amounts to 3.6% for February 2024. In a separate release, the NBB downwardly revised the Q4 growth figure from 0.4% Q/Q to 0.3% with the Y/Y growth at 1.5% instead of 1.6%. Household consumption rose by 0.5% Q/Q, mainly driven by purchases of durable goods. Imports of goods and services fell sharply (-1.2% Q/Q) while export remained stable, resulting in a positive contribution of net exports. Business investments contracted sharply (-8.5% Q/Q) in a general slowdown that was compounded by a number of specific transactions relating to the foreign sales of ships. Government spending and public investment rose by 2% and 0.5% respectively.

Polish state-run economic think-thank PIE estimates that the EU recovery funds just assessed by the Polish government will boost the country’s GDP by 0.2% this year, 1.2% in 2025 and 0.6% after that. They calculated the impact using access to about €60bn of EU’s post-pandemic recovery funds earmarked for Poland (compared to total amount of unblocked payments of €137bn).