Markets
Some of the most remarkable moves ahead of the ECB policy decision were seen in JPY and UK gilts. The former outperformed global peers on increased Bank of Japan policy normalization bets. Events supporting the case succeeded each other quickly. Bloomberg yesterday reported that some government officials have moved to endorse a BoJ rate hike. Officially, the Japanese government still declares the country in a state of deflation but something’s moving. Within the BoJ a consensus is forming as well, with board member Nakagawa this morning being the latest one expressing growing confidence in reaching the 2% target. Finally, this morning’s data showed wages growing at the fastest and consensus-topping clip since June. That came on top of news that the Japanese Trade Union Confederation (Rengo) said its affiliated unions demand a 5.85% wage increase at this year’s spring pay talks (Shunto). That’s the highest in 30 years and is hard evidence of the virtuous wage-price spiral the BoJ is looking for. USD/JPY cascaded since Tuesday from 150.55 to 147.85 today. Strong (expected) wage growth and stubbornly high CPI expectations by firms (see below) drove the gilt underperformance. UK yields rose more than 5 bps at the front at some point, helping sterling to appreciate against the likes of EUR and USD.
The ECB delivered no surprises by holding rates constant and sticking to a natural APP rundown, to be followed by PEPP from 2024H2 at €7.5bn/month with this cap removed by year-end. Growth remains sluggish this year (0.6%, from 0.8%) with downside risks but should pick up further out (1.5% in 2025 and 1.6% in 2026). Lagarde did note the recent improvement in some indicators (eg. PMIs). Inflation continues to ease. Lower energy prices pushed the 2024 forecast down from 2.7% to 2.3%. HICP should hover around the 2% target in 2025 and slightly below that in 2026. Core gauges improved more moderately and from still-elevated levels as high wage growth tempers the process. Forecasts show 2.6%-2.1%-2% over the policy horizon. The downward tweaks mean the ECB will officially hit its target in the medium term. It triggered fresh euro day lows and a drop in European yields (-6 to -7 bps, with knock-on effects in the US and UK) going into the press conference. The audience mostly tried to retrieve guidance for a first rate cut. Confidence in reaching the goal increased but more evidence about disinflation’s durability is needed: “We will know more in April, but we will know a lot more in June.” Data on the outcome of wage negotiations remains key. That comment supported the euro and yields somewhat (EUR/USD around the 1.09 levels prior to the policy decision, yields pare losses to 3-4 bps). It makes the June meeting an increasingly live one from a market point of view. They counted on that one to be the kick-off gathering for quite some time and that hasn’t changed today. It would mean the ECB is pioneering the easing cycle instead of the Fed. About this unusual sequence Lagarde said the ECB takes into account the international environment but that decisions are taken independently.
News & Views
The monthly Decision Maker Panel survey published by the Bank of England slowed that firms’ expectations on price developments are slowing at only a moderate pace. Firms reported that their output prices rose by an average rate of 5.4% in the three months to February down 5.6% in January. Businesses expect their output price to rise by 4.3% over the next year (3m MA). Firms see one-year ahead CPI inflation to decline to 3.3% vs 3.4% in January. The three-year ahead inflation expectations eased from 2.9% to 2.8%, well above the BoE’s 2% target. Firms see a slowdown in employment growth. Growth job growth in the three months to February slowed to 2.3% from 2.4%. Employment for the next 12 months is now expected at 1.6% down from 1.7% (3m MA). Realized wage growth was reported at 6.7%. Wages still are expected to rise 5.2% over the next 12 months. The survey suggests that firms remain cautious to see inflation sustainably return to the BoE’s target short-term, but also in a somewhat longer horizon.
The Central Bank of Turkey (CBRT) introduced a temporary reserve requirement for banks if their monthly loan growth exceeds 2.0%, according to regulation published in the official gazette. The additional reserve requirement follows tightening measures announced yesterday to reinforce the monetary policy stance via non-interest rate measures. The CBRT yesterday reduced the monthly growth limit for LT commercial loans from 2.5% to 2.0%. The limit for monthly growth for general purpose loans was reduced from 3.0% to 2.0%. At least for now, the new measures didn’t halt de decline of the lira. EUR/TRY is setting record at 34.85.
 with downside risks but should pick up further out (1.5% in 2025 and 1.6% in 2026). Lagarde did note the recent improvement in some indicators (eg. PMIs).){kind=link}