Markets
Markets today stayed in a defensive wait-and-and see modus counting down to the long-awaited US announcement sweeping ‘reciprocal tariffs’ next Wednesday. In this context of elevated uncertainty, markets held to a ‘selective’, one-sided reading of incoming economic data. Softer than expected Spanish and French national inflation data were enough for European bond investors to further retrace from the EU reflation trade that dominated trading early this month. German yields decline further between 4.3 bps (2-y) and 5.3 bps (30-y). Even so, the 10-y EMU swap tested the key 2.625% area (Jan 2025 top/recent correction low), but for now this support did its job, blocking further intraday losses. This halt might at least partially have been inspired by (Bloomberg) headlines that the European Commission is working on a ‘term sheet of concessions’ to negotiate a potential trade agreement with the US. We likely will get plenty of this kind of messages on negotiating tactics in the run-up to next Wednesday. It probably tells at least as much on positioning in EMU interest rate markets after recent decline, than on the substance of the matter. At the same time, EMU money markets in the meantime discount about a 85% chance of the ECB further unwinding the policy restriction that is still left after 9 months of protracted easing. In the US, the spending and income data and the PCE deflators brought no unequivocal story either. February personal income was strong at 0.8% M/M, but spending slightly disappointed (0.4% M/M vs 0.5% expected). The headline PCE deflator was bang in line with expectations (0.3% M/M and 2.5% Y/Y). The core measure was marginally stronger at 0.4% M/M and 2.8% Y/Y. The final U. of Michigan consumer confidence release further confirmed the stagflationary narrative from the preliminary release. The consumer expectations confidence index was further downwardly revised to 52.6 (weakest since July 2022). At the same time, inflation expectations were upwardly revised (1-y 5.0%, 5-10 y 4.1%!), raising the risks of a de-anchoring of inflation expectations. It didn’t prevent further Treasuries’ gains in current low visibility environment. US yields decline between 6.0 bps (2-y) and 8.8 bps (10 & 30-y). Equity markets further turn into risk-off modus (S&P 500 -1.1%, EuroStoxx 50 -0.9%.
On FX markets, the dollar failed to hold on to initial gains (104.2). EUR/USD rebounded back above 1.08(1) on the EC tariff negation headlines and on rising US stagflation risks. Still this remains a fragile balance of USD weakness currently outweighing euro fragility. Sterling this morning temporarily profited from stronger than expected February retail sales. EUR/GBP tested the 0.8316 area, but sterling gains also could not be sustained (currently 0.835).
News & Views
Belgian inflation fell by 0.7% m/m to ease from 3.55% to 2.91% in March. Core inflation (excluding unprocessed food and energy products) declined from 3.10% to 2.71%. A range of subcategories all fell in y/y terms, including energy inflation (5.48% from 8.17%), rents (3.27% from 3.3%) and services inflation (3.88% from 4.34%). Food price inflation was the odd one out, accelerating to 2.45%, driven by fruit & sugar, chocolate and jam prices. The biggest decreasing effect came from motor fuels, clothing and plane tickets. The first inflation estimate by European (HICP) standards for Belgium amounts to 3.6%.
The ECB’s monthly survey showed consumer inflation expectations for the year ahead in February matching January’s 2.6%, as did those for the three-year ahead period at 2.4%. They thus remain below the perceived past inflation rate (3.1%, down from 3.4%). Consumers expect their nominal wages over the next 12 months to grow by 1%, a slight uptick from 0.9% in January. They turned more negative on the economy, seeing a 1.2% contraction in the year ahead, deepening from -1.1% in January. As a consequence, the unemployment rate 12 months from now rose from 10.4% to 10.5%. However, since this is about the same as the current perceived rate (10%), it implies a broadly stable labour market. In terms of housing and credit access, consumers expected the price of their home to increase by 3% over the next 12 months, unchanged from January. The net percentage of households reporting a tightening (relative to those reporting an easing) in access to credit over the previous 12 months declined, as did the net percentage of those expecting a tightening over the next 12 months.
