Markets
After a rather clear, straightforward narrative earlier this month including a presumed European reflation and at the same time risks for the US to slip into stagflation dynamics, global markets this week entered a more erratic wait-and-see pattern. Amongst others, the April 2 ‘Liberation Day’ tariffs are looming large. The March US consumer confidence (Conference Board) confirmed the stagflation mix seen in other sentiment indicators of late. The headline index declined from 100.1 to 92.9, but expectations nosedived (74.8 from 65.2, the lowest in 12 years). Inflation expectations for the next 12 months rose further from 5.8% average to 6.2%. US yields reversed an initial up-tick with yields closing the session lower between 2.6 bps (5-y) and 0.4 bps (30-y). In an FT article this morning, Fed Goolsbee indicated that if market-based long-term inflation expectations would move toward recent rises in survey expectations, this would be a red flag which the Fed would have to address ‘almost regardless of the circumstances’. Overall Goolsbee indicated that wait-and-see remains the preferred approach when ‘there’s a lot of dust in the air’. Equities showed some intraday swings but closed in green on both sides of the Atlantic, Europe this time outperforming (S&P +0.16%, Eurostoxx 50 +1.09%). No clear trend in the dollar. DXY ran into resistance after recent rebound (close 104.18). Even so, also the euro failed to profit (EUR/USD close 1.0791).
This morning, Asian equities mostly show limited gains, but caution prevails going into the end of the quarter and the April 2 deadline. Later today, the eco calendar in EMU is thin. In the US, the February durable goods orders will only be of intraday importance. The US CBO gives an estimate on when the country reaches its debt ceiling. The Goolsbee comments, alongside last week’s Fed dots in theory should help to put a floor for US (ST) yields. EUR/USD struggles to avoid further losses below 1.08. The UK ONS reported UK headline inflation slightly lower than expected at 0.4% M/M and 2.8% Y/Y (from 3.0%). Core inflation also eased to 3.5% from 3.7% (3.6% expected), but services inflation remains elevated at 5.0%. Sterling is ceding modest ground after the release (EUR/GBP 0.8345). Question is whether this provides enough room for the BoE to continue further easing in May. UK Chancellor Rachel Reeves will present the Spring Fiscal update. The Office for Budget responsibility in a new forecast might signal lower growth and higher inflation, further pressuring UK finances. Reeves is expected to respond with additional spending cuts (£10bn?). A restrictive fiscal policy in theory turns the focus to monetary policy (if there is room) and ceteris paribus also shouldn’t be great news for sterling.
News & Views
Moody’s warned the US for a deteriorating fiscal outlook, saying that president Trump’s policies including trade tariffs and unfunded tax cuts could in fact do more harm than good for government revenues. Moody’s is the last of the three major ones to have assigned the US a topnotch AAA-rating. It downgraded the outlook to negative in November 2023 though over entrenched political polarization and worrying fiscal developments. Moody’s said yesterday the situation has only deteriorated further since. “Fiscal strength is on course for a continued multiyear decline” even in very favorable economic and financial scenarios, it added. And while Moody’s assumes a still strong and resilient US economy, it said that these “formidable strengths” may no longer offset widening fiscal deficits and declining debt affordability. The rating agency also warned for the significant long-term consequences that the US policy agenda on trade, immigration, taxes, federal spending and regulations could have as it reshapes not only the US but also the global economy.
The Hungarian central bank (MNB) kept policy rates as expected steady at 6.5%. They won’t be lowered any time soon either with the new governor Varga in his first presser pointing to a deterioration in the inflation outlook. While inflation likely peaked in February (5.6%), strong price dynamics in market services point to higher prices throughout the year, the central bank statement reads. In the upwardly revised projections, CPI won’t return to the central bank 3% +/- 1 ppt tolerance band before the beginning of 2026 and hit the mid-point by the end of that year. Forecasts for this year were put sharply higher, from 3.3%-4.1% to 4.5%-5.1%. Inflation risks remain tilted to the upside. Private consumption is expected to drive economic growth with recovering external demand (exports) adding to that over the medium term. GDP should grow by 1.9-2.9% in 2025 and 3.7%-4.7% in 2026. The forint closed at a slightly weaker level against the euro in volatile trading. EUR/HUF remains just south of 400 though. Hungarian swap yields dropped sharply, up to 20 bps, suggesting the market pricing was getting stretched. Virtually no cuts were priced in for this year prior to the central bank decision..
