Sunset Market Commentary

Markets:

The ECB released a statement on the changes to the operational framework for implementing monetary policy. In the new framework (cf infra), the ECB will provide liquidity through a mix of instruments including the main refinancing operations (MRO’s), new structural longer-term refinancing operations and a structural portfolio of securities. However, the deposit rate facility will remain the main instrument to steer the monetary policy stance . For now, the announcement has little impact on money and bond markets. There were no eco data to guide trading in US and EMU today. Over the previous days, several ECB members indicated that the ECB was coming closer to the point where it can start cutting rates. Bank of France governor Villeroy recently indicated that the ECB could cut rates in spring, with the ECB having upcoming meetings in April and June. Villeroy keeps a data-dependent approach but today clarified that June is probably more likely, again aligning with the guidance from ECB Lagarde at the press conference last week. The June guidance is currently putting a floor for EMU yields with German yields in technical trading rising 1-2 bps. Similar dynamics on US interest rate markets. The 0.4% monthly CPI inflation pace (February), suggests that there is no room for the Fed to turn softer in its policy assessment/dots at next week’s policy meeting. On the contrary. US yields maintain yesterday’s gain even adding another 2-3 bps. European equities still succeed some catching-up gains after yesterday’s rally on WS (Eurostoxx 50 +0.5%). US indices take a breather, but are still holding within reach of recent peak levels.

In most major FX cross rates, volatility remains (very) low with little directional momentum. DXY eases marginally (102.85). The euro beats the dollar on points (EUR/USD 1.0935). The yen slightly underperforms the dollar even as anecdotic evidence suggests a rather strong outcome of Japanese wage negotiations (USD/JPY 147.9 from 147.7). Sterling is losing slightly further ground against the euro, with EUR/GBP again hovering near the 0.855 pivot. After a soft UK labour market report yesterday, the January monthly GDP (0.2% M/M) and production data were not strong enough to give sterling additional momentum. The potential test of the key EUR/GBP 0.85/0.8493 support is called off, at least for now. A return above 0.858 is needed to put the pair again in more neutral territory.

News & Views:

The ECB announced its new framework to steer short-term money market rates in line with monetary policy decisions as the Eurosystem balance sheet normalizes. The central bank will continue steering monetary policy rate by adjusting the deposit rate. Short-term money market rates are expected to evolve in vicinity of the deposit rate. Main refinancing operations (MRO’s) and longer-term refinancing operations (LTRO’s) continue to be conducted through fixed-rate tenders with full allotment against broad collateral. In a later stage, new structural LTRO’s and a structural portfolio of securities will be introduced taking into account legacy bond holdings. On September 18, the ECB will narrow the 50 bps spread between the main refinancing rate and the deposit rate to 15 bps by lowering the MRO rate by 35 bps. The spread between the MRO rate and the marginal lending facility will remain unchanged at 25 bps. The reserve ratio for determining banks’ minimum reserve requirements remains unchanged at 1%. The remuneration of minimum reserves remains unchanged at 0%. The Governing Council will review the key parameters of the operational framework in 2026 and stands ready to adjust the design and parameters of the framework earlier, if necessary.

EMU industrial production decreased by 3.2% M/M in January according to first estimates from Eurostat. Details showed declines in capital goods (-14.5% M/M), durable consumer goods (-1.2%) and non-durable consumer goods   (-0.3%) while energy (+0.5% M/M) and intermediate goods (+2.6% M/M) increased. In Y/Y-terms, productions fell by 6.7%.