In focus today
We have a light schedule for today.
In the euro area, focus is on German ZEW data for March. The assessment of the current economic situation is still very poor while the expectations component has increased significantly. Momentum in the German economy is weak, so it will be interesting to see if this changed in March ahead of the PMIs on Thursday.
In Sweden, Deputy Governor Martin Flodén gives a lecture on the economic situation and current monetary policy at 14:00.
Economic and market news
What happened overnight
In Japan, the Bank of Japan (BoJ) has decided to set the overnight call rate as its new policy rate and guide it in a range of 0-0.1%, finally ending the era with negative interest rates. At the same time, it officially terminates yield curve control. BoJ does, however, promise to continue its JGB purchases at broadly the same pace and make nimble responses in case of rapid rate increases. The decision was taken with a 7-2 majority vote, with the opposing members asking for more time to see the wage outcome in smaller businesses, which was also our key argument why the BoJ would wait to move in April. At the same time, the central bank discontinues its ETF and J-REIT purchases. The move was largely priced in already and thus the market reaction has been modest, with USD/JPY trading higher from the 149.3 to 149.8 levels and the 10-year JGB-rate actually dropping a couple of basis points as central bank purchases remain intact.
We expect the BoJ to move cautiously from here and we do not see a steep hiking cycle ahead. BoJ will assess the situation meeting by meeting and might find room for a few more small hikes if wage growth on big business rubs off sufficiently on the SME segment.
In Australia, as anticipated by markets and consensus, the Reserve Bank of Australia (RBA) kept its policy rate at 4.35%. Previously, RBA had still explicitly maintained the door open for further hikes, but now they simply stated that ‘the board is not ruling anything in or out’, which the markets took as a relatively more dovish signal. Markets are now pricing in the first rate cut for the September meeting.
What happened yesterday
In the euro area, final HICP inflation figures for February confirmed the flash print. Hence, headline inflation rose 2.6% y/y, core 3.1% and food 4.0%, energy fell 3.7%, while services rose 4.0% and core goods rose 1.6%. In general, decomposing the print reveals that the disinflationary process continued, though the momentum in core services remained markedly high and ongoing, posing upside risks to the inflation outlook. Moreover, food inflation has finally started to approach the 2% target after being elevated for a long time.
In Norway, Mainland-GDP surprised to the upside, coming in at 0.4% m/m (cons: 0.1%), clearly higher than what Norges Bank (NB) estimated in the December MPR (-0.2%). Hence, the print hints toward some slightly hawkish tones ahead of the MPC-meeting on Thursday where we expect NB to keep the policy rate unchanged at 4.5%.
In the commodity space, Brent crude climbed to USD86/bbl, its highest level since November, amid Ukraine intensifying attacks on Russian energy infrastructure.
Equities: Global equities were higher yesterday with Europe being a notable underperformer despite a cyclical rotation and macroeconomic news if anything slightly supportive for Europe. In the US we saw a much more growth-cyclical rotation with communication services massively outperforming driven by mega cap GOOGL. Small caps underperformed after a strong Friday session. It is fascinating to see all the hype and frenzy playing around AI and large cap tech while more or less the opposite is taking place in small caps. Investors can easily agree that large cap AI-related tech looks expensive, but they dare not underweight them after a very strong run. Small caps look cheap and attractive, but no one dares to overweight them after a very long run with massive underperformance. In US yesterday, Dow +0.2%, S&P 500 +0.6%, Nasdaq +0.8% and Russell 2000 -0.7%. Asian markets are mixed this morning with Japan outperforming after a dovish hike from BoJ weakening the currency. US and European futures are lower this morning.
FI: Yields grinded marginally higher with limited new information as markets await the FOMC meeting tomorrow evening. The final inflation data from the euro area did not impact markets, however it showed some noteworthy trends as the domestic inflation gauge, on which Lagarde and ECB have focused a lot over the recent months, only declined marginally to 4.5% while also the PCCI indicator rose to above 2%. We do not think that ECB will deviate from delivering the first rate cut in June, however this clearly questions the number and pace of rate cuts that will follow. Markets are pricing the June cut at 19bp and 84bp by year end.
FX: USD/JPY jumped immediately after the BoJ announced an end to its negative rate policy and yield curve control. EUR/USD fell below 1.09 ahead of tomorrow’s FOMC meeting. AUD/USD dropped after the RBA removed its tightening bias.
 has decided to set the overnight call rate as its new policy rate and guide it in a range of 0-0.1%, finally ending the era with negative interest rates. At the same time, it officially terminates yield curve control. BoJ does, however, promise to continue its JGB purchases at broadly the same pace and make nimble responses in case of rapid rate increases. The decision was taken with a 7-2 majority vote, with the opposing members asking for more time to see the wage outcome in smaller businesses, which was also our key argument why the BoJ would wait to move in April. At the same time, the central bank discontinues its ETF and J-REIT purchases. The move was largely priced in already and thus the market reaction has been modest, with USD/JPY trading higher from the 149.3 to 149.8 levels and the 10-year JGB-rate actually dropping a couple of basis points as central bank purchases remain intact.){kind=link}