Sunset Market Commentary

Markets

The eco calendar in Europe and the US this week is backloaded with the publication of key (national) EMU inflation data starting tomorrow and the Fed’s preferred inflation measure (PCE deflator) scheduled for release on Friday. Some less high profile data and CB comments in the meantime have to guide the day-to-day market dynamics post-Fed. However, data published today, were too close to expectations to provide any clear directional bias. German GFK consumer confidence improved slightly more than expected (-27.4 from -28.8), but this evidently won’t change the ECB’s assessment on (the start of/extent of) policy easing. German yields are ceding less than 1 bp across the curve. Somewhat of a similar wait-and-see narrative in the US. The March Philly Fed non-manufacturing business activity index in dropped more than expected from -8.8 to -18.3. Durable goods statistics were mixed. Headline orders printed slightly stronger than expected (1.4% M/M) as was the case fore core orders ex transportation (0.7%). At the same time, capital goods shipments non-defense ex aircraft delivered a slight miss with a -0.4% monthly decline. US house prices rises (S&P CoreLogic CS 20 city) slowed to 0.14% M/M, but this still resulted in a strong 6.59 Y/Y rise (from 6.15%). There is no one-on-one link with housing related components in the inflation gauges, but it probably won’t translate into a sharp decline in this key factor anytime soon. Last but not least, consumer confidence of the Conference Board, stabilized at 104.8 but last month was downward revised. Consumer remain upbeat in their current situation (151 from 147.8), but are turning more cautions in the future. Again a difficult mix from a market point of view. US yields currently are rising 1- 2 bps across the curve (benchmark change for the 2-y, -1.8 bps). The US 10-y real yield post Fed dropped back from 2%+ levels to 1.85% and last week/early this week and tries to turn north again. However, for now this has only a limited impact on risk assets or on the dollar. US equities  again succeed modest gains (Nasdaq + 0.5%). Eurostoxx 50 also sets a new cycle top. Oil also holds north of $86 p/b.

On FX market, the dollar is again locked in tight ranges, with a tentative negative bias. DXY eases to 104.12, EUR/USD ‘rises’ to 1.085. The yen fails to gain against the US currency despite strong verbal interventions from Japanese authorities of late. At USD/JPY 151.4 the multi-year top (weakest for the yen) remains dangerously close-by. Sterling underperforms, even as BoE’s Mann (admittedly one of the hawkish members within the MPC) says markets are pricing in too many rate cuts. EUR/GBP (0.8585) again nears first resistance (support for sterling) at 0.8600/02.

News & Views

In spite of Glapinski’s olive branch this weekend, Poland’s ruling coalition kicked off a probe into the NBP governor today. The Tusk government accuses the central bank head and PiS appointee of political partisanship with the surprise rate cuts ahead of the October elections and the change of heart shortly thereafter being one of the most contentious decisions. The fall-out on the zloty remains limited for now and EUR/PLN continues to hover near the multiyear lows around 4.30. Even if Glapinski was ousted or resigns himself, it would probably not change a lot to the current higher for longer rates regime. His successor, first deputy Kightley, is known for her Glapinski-alike views.

The Hungarian central bank (MNB) already scaled back the recently increased cutting pace. It lowered the policy rate by 75 bps to 8.25%. Inflation eased more than projected in the December report and could average between 3.5 and 5% this year and 2.5-3.5% in 2025 and 2026. In addition, labour market tightness eased and growth forecasts were lowered compared to December to mostly reflect weak external demand. GDP should expand 2-3% this year before picking up to 3.5-4.5% in 2025. Offsetting these arguments for continuing on the same monetary path of February (ie 100 bps cut), was the volatile international environment. MNB said that raised the risk premium on Hungarian assets recently. It clearly alluded to the latest sell-off of the forint when EUR/HUF came close to the symbolically important 400. But we are looking at the sharper (compared to regional peers) uptick in (swap) yields in recent weeks through a similar lens. With “risks surrounding global disinflation, volatility in international investor sentiment and the temporary rise in domestic inflation expected in the middle of the year”, the MNB said the monetary policy approach needs to be a careful one. This reveals a preference to stick to the current pace (or lower). The forint breathes a sigh of relief but isn’t out of the woods, with EUR/HUF holding north of 395.