Sunset Market Commentary

Markets

Sticky. There’s no better way to describe today’s US CPI print. Headline and core inflation rose by 0.4% M/M in February. Both are in line with forecast, given that core CPI actually increased by 0.358% (vs 0.3% forecast). Annual readings increased for the top figure (3.2% Y/Y from 3.1% Y/Y) and fell slightly less hoped for the core gauge (3.8% Y/Y from 3.9% Y/Y). Details showed that shelter and gasoline costs were among the ones responsible for the increase with the food index being unchanged. The so-called supercore measure which filters out core services excluding shelter, rose by 0.47% M/M (4.3% Y/Y). That’s less than the extreme increase in January 0.85% M/M but still more than double the pre-pandemic average. We don’t think that today’s price figures provided the additional evidence Fed Chair Powell is looking for to give the go-ahead on a less restrictive monetary policy. Looking forward, base effects make it very likely that headline inflation will return and hold near levels around 3.5% Y/Y in coming months. Monthly CPI prints for the March – July 2023 period were either 0.1% or 0.2% with the exception of April (0.4% M/M). These low hurdles are easy to match, especially with the volatile energy component out of play. The bar for core CPI is higher, but there sticky services inflation and the delayed impact on shelter costs provide a solid “floor”. A gradual normalization of the labour market and the absence of financial shocks suggest that the Fed will only by the time of the August CPI release (September 12) at the earliest see renewed disinflationary momentum. All of a sudden, risks for next week’s FOMC meeting seem to be tilted to the hawkish side. Recall that the median outcome of the December dot plot for 2024 (4.5%-4.75% EoY policy rate) wasn’t a unanimous one. 8 out of 19 FOMC members only expected a cumulative 50 bps rate cuts over the course of this year. The probability of a May and June policy rate cut today fall to 13% and 75% respectively, with markets again more aware of the risk of a delayed start. US Treasuries spiked lower after the inflation print. US yields currently rise 4 to 5 bps across the curve. Tonight’s $39bn 10-yr Note auction will suddenly draw some more attention again… German Bunds drop in sympathy with yields up to 3 bps higher at the front end of the curve. The dollar enjoys the yield advantage with EUR/USD changing hands just above 1.09. Thinking above risk scenarios through suggests significant downside potential in the pair if the ECB sticks to its “independence” (of the Fed). Equity markets take today’s inflation numbers surprisingly positive with key US benchmarks currently up to 0.5% higher. We end with EUR/GBP which is back into familiar territory around 0.8550 after unexpectedly testing the low 0.85 area at the end of last week. Slightly disappointing UK labour market data this morning triggered the move higher.

News & Views

The Czech statistical office yesterday reported that inflation returned to the 2% inflation target in February. This reopened the debate whether the Czech National bank (CNB) has room to step up the pace for rate cuts from current 50 bps steps. The next CNB meeting takes place on March 20. Two MPC members today advocated caution. Vice Governor Zamrazilova indicated that she will consider a quarter or a half-point rate cut at next week’s meeting. She isn’t considering ‘jumbo’ rate cuts. Ongoing price pressures in the services sector and a weak koruna warrant a cautious approach. CNB Kubicek in a separate interview with Reuters now sees inflation risks as rather balanced. He indicated likely to back a 50 bps rate cut next week. “Inflation figures speak for a faster decline (in rates). But the exchange rate has delivered part of the easing of monetary conditions.” Retail sales today also grew a faster than expected 1.0% M/M and 2.4% Y/Y in February. The koruna rebounded from EUR/CZK 25.33 to 25.26.

France remain at risk not reaching its deficit reduction target. The government last month announced €10bn of measures to reach the 2024 budget deficit target of 4.4% of GDP. According to the national audit office, the government might be too optimistic on its tax revenue assumptions as growth is only expected at 1% instead of 1.4% initially. Even this 1% growth target is considered optimistic. The country’s debt will reach 110% of GDP at the end of the year. Between 2023 and 2024, the cost of just servicing French debt will rise from €10bn to €57bn. The Cours de Comptes labels France’s public finance situation as among the worst in the euro zone.