Markets
US Treasuries sold off yesterday after sticky February US CPI inflation data. Headline inflation accelerated from 0.3% M/M in January to 0.4% M/M with core inflation sticking at that 0.4% M/M pace for a second month running. The Fed’s so-called super-core inflation which zooms in on core services excluding shelter, rose by 0.5% M/M. Although down from a superhot 0.85% in January, that’s still more than double the pre-pandemic pace. Annual paces for topline, core and supercore CPI were 3.2%, 3.8% and 4.3% respectively. Yesterday’s data don’t give Fed Chair Powell the longed-for additional evidence that inflation is on a sustained path to the 2% target. The US Federal Reserve’s data-dependence even risks backfiring in coming months. Base effects make it very likely that headline inflation will return and hold near and above levels of 3.5% Y/Y until at least September. Sticky services inflation and the delayed impact on shelter costs provide a solid “floor” for core CPI. US Treasury yields rose by 5 to 6 bps across the curve yesterday with the belly underperforming the wings. They closed near intraday highs with a tailing $39bn 10-yr Note auction failing to offer some counterweight. The market implied probabilities of a 25 bps rate cut in April and June fell to 15% and 77% respectively. Risks for next week’s FOMC meeting seem tilted to the hawkish side. The dollar initially profited from the interest rate support with EUR/USD sliding from 1.0940 to 1.09. The pair eventually closed unchanged on the back of bullish risk sentiment. Another massive performance by the likes of Nvidia outweighed the inflation scare, pushing major US benchmarks to daily gains of up to 1.54% for Nasdaq.
Japanese bond futures felt some late selling pressure this morning as a wide range of labour unions announced robust pay increases. The Japanese Association of Metal, Machinery and Manufacturing Workers secured an average 5.32%. Rengo, the nation’s biggest union federation, announces first results on Friday. The Japanese yen at USD/JPY 147.70 for now fails to profit further from BoJ normalization bets. Today’s eco calendar is empty apart from a $22bn 30-yr Bond auction. We expect yesterday’s CPI-vibes to remain in play, resulting in an underperformance of US Treasuries and an advantage for the dollar. Especially as more ECB governors, including hawks like ECB Wunsch, center around a June rate cut.
News & Views
The Hungarian forint yesterday weakened to just below EUR/HUF 400. Both political tensions between the government and the central bank and ongoing discussions with the EU on the release of blocked funds are at play. With respect to the former, the Hungarian central bank repeated that new legislation to widen the Supervisory Board’s control will hurt its independence. “While on the surface the current central bank bill is about other tasks, it serves the sole purpose of influencing NBH management’s decisions related to basic tasks and other decisions within the scope of NBH independence”. The government indicates that it only serves activities that are unrelated to monetary policy, including the MNB’s investments. On the second subject, a legal Committee of the European Parliament voted to take the European Commission to court as it contests the Commission’s decision in December to release €10.2bn of blocked EU funds. The EP President has the final say whether to proceed with the lawsuit.
The Bank of Spain in its quarterly update upwardly revised its growth outlook. Spanish GDP growth is now only expect to slow from 2.5% in 2023 to 1.9% this year (was 1.6%). This also brings growth more in line with the 2% forecast of the government. The upward revision of Spanish growth contrasts with the ECB last week downwardly revising 2024 EMU growth from 0.8% to 0.6%. The BoS expects 1.9% growth in 2025 and 1.7% growth in 2025. Unemployment is expected to decline further from 12.1% in 2023 to 11.6% this year and to gradually ease further to 11.3% in 2026. Inflation is set to decline over the projection horizon, falling from an average of 3.4% in 2023 to 2.7%, 1.9% and 1.7%, in 2024, 2025 and 2026. The main factors behind the revision this year are lower energy prices and the partial extension of some measures to cope with the inflationary episode. The BoS also cited the contribution of foreign workers to the labour market and European relief funds as factors supporting Spanish economic growth.
