Sunset Market Commentary

Markets

It was a drawn-out stretch towards the publication of the US services ISM today (read about it down below). Core bonds in the meantime gained ground with US Treasuries in particular shaking off yesterday’s Bostic’s comments. The Atlanta Fed president warned for inflation risks from “pent-up exuberance”. That’s how he describes companies being ready to spend and hire when “the time is ripe” (read: when the Fed starts cutting rates). Should the Fed heed Bostic’s advice and pause after it cut rates for a first time in Q3, the December dot plot’s total of 75 bps (three cuts) is even beginning to look overly optimistic. Anyway, US yields drop between 2.9 and 6.2 bps with the long end outperforming. Losses in the 10-y yield for example extended after slipping below intermediate support area between 4.17% (200 daily moving average) and 4.18% (mid-February correction low). German Bunds outclass Treasuries. Yields print 4.8 (2-y) to 8.2 bps (30-y) lower in a similar curve shift. The drop in core bond yields helped gold to temporarily surpass the previous intraday record high of early December. In terms of closing prices, the shiny metal already set a new record yesterday following a curious two-day rally and is on track to hit another today. Stock markets struggle for direction. The EuroStoxx50 wavers some 0.2% from its post-GFC top while Wall Street returns  0.5-1%. Switching to currency markets, we note some JPY outperformance vs global peers – be it without technical implications. USD/JPY holds just north of 150, EUR/JPY eases a few ticks but hovers around recent highs at 162.8. Sterling is doing good despite gilt outperformance pushing yields more then 10 bps (10-y) lower. EUR/GBP inches lower to below 0.855 but with the broader stalemate in the pair not going anywhere.

The February US services ISM missed the headline reading of 53 by coming in at 52.6, a slightly bigger retreat from the 53.4 in January. Details showed employment dipping to 48 as the main culprit for the undershoot. New orders however unexpectedly expanded at a faster clip (56.1 from 55). The latter is coming on top of already strong business activity (rises from 55.8 to 57.2). That combination may well mean the employment setback is only temporary. Prices paid eased to 58.6, erasing part of the January uptick. All in all a good reading considering the underlying series. Yields in the US nevertheless lose a few more extra basis points in a first reaction, dragging German yields along.

News & Views

The German government coalition today proposed plans for supplementary pension scheme that should help to address the challenges to the funding of the pension system in the next decade. The new scheme will be funded both by loans and transfers from the federal budget. Investment in the fund should amount to €200 bln by the middle of next decade. From 2035, the proceeds from the fund should flow back to the pension system and mitigate the burden of the pension costs for employees and the government budget. From the mid-2030’s, €10 bln should annually flow from the fund to the pension system. The government intends to guarantee that pension payments can be kept at least at 48% of the average wage until end of the 2030’s. Additional measures should be taken to guarantee it beyond 2039, according to the government. The government wants the new measures to be approved in Parliament before summer.

Hungary today published details on Q4 GDP growth. Activity in the economy was unchanged both from the previous quarter as well as compared to the same quarter in 2022. The expenditure approach showed that households consumption rose by 0.8% Q/Q while government consumption decreased by 0.7% Q/Q. Gross fixed capital formation increased by 1.0%. With respect to external trade, both volumes of imports and exports decline respectively by 2.0% and 2.3%. In a production approach agriculture (+4.2%) and services contributed positively to Q4 growth. Activity in construction (-1.6% Q/Q) and industry (-1.9%) decreased in Q4. Overall in 2023, activity in the Hungarian economy was 0.7% lower (calendar adjusted) compared to 2022.