Sunset Market Commentary

Markets

The EMU economy came close to stabilizing in March with price pressures easing. The composite PMI recovered slightly more than hoped, from 49.2 to 49.9 (vs 49.7 consensus), matching the best (least bad) outcome since June of last year. Divergence between a weak export-oriented manufacturing sector (45.7 from 46.5) and a recovering domestic services industry (51.1 from 50.2) increased. Ongoing falls in output in France (composite 47.7) and Germany (composite 47.4; mainly manufacturing weakness) offset a gathering upturn in the rest of the EMU, pointing to an even more uneven economic picture. Encouragingly, order books fell at a reduced rate and business confidence about the year ahead improved to a 13-month high. In manufacturing, destocking is close to no longer being a drag on production. Supplier delivery times at goods producers improved, facilitating a further fall in manufacturing input prices. Service sector input cost and selling price inflation rates meanwhile remained elevated due to higher wage costs, though a cooling in the pace of increase in cost burdens was recorded. Today’s PMI’s keep the ECB on schedule to conduct a first 25 bps rate cut in June. Following the release, EUR/USD fell back from 1.0940 to just below 1.09. Early US eco data (consensus-beating Philly Fed Business Outlook, another low number of weekly jobless claims and decent PMI’s; composite 52.2) help the greenback out as well. German yields currently lose up to 3.5 bps at the front end of the curve, but that’s mainly because of lower opening catching up with yesterday’s post-Fed market reaction. Changes on the US yields curve vary between -0.9 bps (30-yr) and +3 bps (2-yr).

The Bank of England kept its policy rate unchanged at 5.25%, but the voting pattern changed. Hawkish members Mann and Haskel no longer advocate a 25 bps rate hike, joining the majority. BoE Dhingra voted for a second consecutive meeting in favor of a 25 bps rate cut and is now the sole dissenter on the 9-headed MPC. Forward guidance at today’s intermediate meeting was left unchanged as well: the BoE keeps under review how long rates should be kept unchanged. Minutes added that monetary policy could remain restrictive even in case of rate cuts. “Things are moving in the right direction”, BoE chair Bailey later added at the press conference stressing encouraging signs that inflation is coming down. CPI inflation is projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget. UK Gilts outperform today with yields sliding up to 7 bps for the 2-yr tenor as market thinking shifts from the August to the June meeting for a first BoE rate cut. EUR/GBP rises from 0.8540 to 0.8560.

News & Views

The Swiss National Bank cut its policy rate by 25 bps to 1.50% after recently suggesting that the (real) appreciation of the franc had contributed more than enough to slow inflation. It also further eroded (export) demand. The SNB sharply downwardly revised its 2024-26 inflation forecast. At 1.4%, 1.2% and 1.1% respectively, inflation remains easily within the 0%-2% price stability band. In the short term, goods prices in particular continue to ease while inflation is mainly driven by services prices. Longer term, the risk of second-round effects is significantly reduced. With inflation back on track, the SNB can shift its focus back to stimulating economic growth. The SNB expects (moderate) growth of 1% this year and unemployment may rise a bit further. The Swiss franc takes a logical step back from EUR/CHF 0.9675 to 0.9765. The SNB officially has no exchange rate target, but a further depreciation to EUR/CHF 1.00 would probably be welcomed. If this (real) FX correction doesn’t go according to plan, the SNB may further scale back policy tightening in June given low inflation. We don’t see today’s SNB’s action as a harbinger of global “frontloading” of monetary easing. Switzerland is in a unique situation.

The Norges Bank kept its policy rate unchanged at 4.5%. Monetary policy is having a tightening effect and economic growth is low. Inflation is slowing but still markedly above target (4.5% Y/Y in February), mainly because of elevated services inflation. Sharply increased business costs, high wage growth and the Norwegian krone’s depreciation through 2023 will contribute to keeping inflation elevated ahead. Compared to the December policy report, growth was nevertheless higher than expected while inflation cooled more. The MPC remains concerned that prematurely lowering its policy rate could keep inflation high and is ready to raise the policy rate again if necessary. The base scenario assumes unchanged rates until autumn though. EUR/NOK is little changed at 11.55.