Markets
This week’s volatile and often erratic trading pattern continued today. European markets obviously started in a bad mood as US President Trump pushed through (the partly anticipated) 25% tariffs on the car sector after European close. Key European indices started with losses of around 1.5%, but avoided a steeper drop with the unknown known finally morphing into a known known and at least providing the advantage of clarity. EUR/USD dipped since yesterday’s tariff pre-lude from the 1.0795 area to 1.0740 in Asian trading, only to be back at start as we finish this report. The German Bund opened strong, but rapidly turned south in lockstep with UK Gilts and US Treasuries. UK Chancellor Reeves tried to defend her Spring budget, but the focus on future payback effects from structural reforms isn’t the one markets currently want to see. Stressing that it’s okayed by the UK Office for Budget Responsibility (OBR) isn’t the best sales argument given the OBR’s track record of painting a too rosy economic picture. It means either more economic pain in the Autumn update (tax hikes, spending cuts) or choosing for the “easy” way by giving up fiscal rules. Today’s Gilt sell-off suggests markets take the second route more and more into account. The UK 10-yr yield touched 4.8% for only the second time since 2008 following a brief period higher in January. US Treasuries followed the move south with tonight’s long-term budget outlook (2025-2055) from the Congressional Budget Office in mind. The US 10-yr yield tested first technical resistance at 4.4%, but a break higher in yields was blocked for now. A marginal downward revision to the Q4 PCE deflator (2.6% Q/Q from 2.7%) and continuously low weekly jobless claims (224k) might have marginally helped. Souring risk sentiment going as US dealings kicked off, played a role as well in balancing (long term) core bond losses from an intraday perspective. The front end of core bond curves outperformed, especially in Europe. ECB comments were mixed with Wunsch suggesting that a pause for April should at least be on the table given upside inflation risks. ECB Kazaks argues in favour of a gradual reduction in rates in the future if the ECB’s baseline scenario holds. However, geopolitical uncertainty is so high that it makes a difficult navigating. ECB vice-governor De Guindos leaves it out in the open for April, balancing all risks. Our base scenario is final 25 bps rate cut followed by a long pause.
News & Views
The Norges Bank (NB) today left its policy rate unchanged at 4.5%. In the respect, the NB ‘backtracked’ on guidance at the January 22 meeting that “the policy rate will likely be reduced in March”. Inflation picked up in recent months and has been markedly higher than expected (1.4% M/M and 3.6% Y/Y, core 1.0% M/M and 3.4% Y/Y in February). Wage growth in 2024 also turned out higher than projected. This could lead to higher inflation ahead than previously projected. Economic activity fell towards the end of last year and was lower than expected, but Norges Bank’s Regional Network Contacts reported increased activity over winter. In this context, the NB judges that a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon. The NB upwardly revised its expectations for the CPI-ATE for 2025 to 3.4% (from 2.7%) and to 2.9% from 2.7% for 2026, but still expects inflation to return to 2.1% in 2028. At the same time, the NB is aware that an overly tight policy could restrict the economy more than needed. Trade-offs make the MPC conclude that the current stance is warranted for somewhat longer than previously signaled. The new NB forecast is consistent with a decline in the policy rate to 4% by the end of the year (September & December rate cuts), followed by a very gradual further decline over the next years towards 3% by 2028. The krone briefly declined to EUR/NOK 11.39 at the time of the decision but currently trades little changed near EUR/NOK 11.34.
The Hungarian government announced additional requirements for investment funds today. From October, they must hold at least 3% of their assets in short-term government debt. There’s already a rule in place, obliging them to hold 5% in government bonds. Those minimum requirements increase to 4% and 6% respectively from April 2026 while those levels rise to 5% and 10% for bond funds. Hungarian bonds rallied after the announcement with the 10-yr government bond yield currently shedding up to 10 bps.
 25% tariffs on the car sector after European close. Key European indices started with losses of around 1.5%, but avoided a steeper drop with the unknown known finally morphing into a known known and at least providing the advantage of clarity.){kind=link}