Sunset Market Commentary

Markets

ECB President Lagarde elaborated yesterday in her regular testimony before European parliament on the divergence between actual and perceived inflation. Inflation perceptions matter because they also influence inflation expectations. BoE governor Bailey earlier this week made a similar remark. By doing so, today’s monthly ECB Consumer Expectations Survey (January) drew some extra attention. On the positive side: both perceived inflation over the previous 12 months and expectations for the next 12 months decreased by 0.2 ppt to respectively 3% and 2.6%. Both obviously remain more sticky above the central bank’s 2% target than actual (core) inflation numbers. Expectations for inflation 3-years ahead remain unchanged though at 2.6%, matching the highest level since March 2023. News on the actual inflation front was mixed. The day started with higher-than-expected February readings for both France (0.8% M/M & 1.1% Y/Y vs 0.5% & 0.8% expected) and Spain (0.4% M/M & 2.5% Y/Y vs 0.3% & 2.3% expected) but German numbers offered some counterweight (0.4% M/M & 2% Y/Y vs 0.5% & 2.1% expected). Aggregate numbers for the euro zone are scheduled for next Tuesday. Consensus expects a 0.4% M/M pick-up with the headline number still leveling at 1.7% Y/Y because of (energy-related) base effects. Risks are slightly tilted to the upside of expectations. The euro made a very small attempt to gain on the first higher national inflation numbers (EUR/USD 1.18 to 1.1820), but the move rapidly fizzled out. In the US, producer prices were the economic highlight. Both headline and core PPI rose faster than expected (0.5% M/M & 0.8% M/M) in January with annual readings coming in at 2.9% (from 3%) and 3.6% (from 3.3%) respectively. On a positive note, goods price deflation went from -0.1% M/M in December to -0.3% M/M in January. The Fed has been very attentive to this metric as it is linked to the US trade agenda. Services price inflation accelerated to 0.8% M/M though, in what are mixed signals though for the US central bank. Markets ignored the numbers as they were overshadowed by geopolitical risk aversion. The US Embassy in Jerusalem authorized the departure of non-emergency US government personnel and their family members for their US mission in Israel due to safety risks. The warning comes after a third round of (deadlocked) nuclear talks between the US and Iran in Geneva yesterday. Earlier, the US announced that it was pulling personnel from Lebanon. Markets are on high alert on possible US military action and err on the side of caution going into the weekend. Brent crude prices set a new short-term high at $73/b. Core bonds gain ground with German and US yields dipping between 1-4 bps across the curve. For the US that means a test of key support at 3.4% for the 2-yr and 4% for the 10-yr. In FX space, the trade-weighted dollar keeps bumping into the 98 resistance area. Risks of a break rise in closing, upward, triangle pattern. The Swiss franc outperforms (see below). The combination of risk off and another political blow to the Labour government (losing Manchester area by-election to Greens) pushes EUR/GBP through 0.8750 resistance.

News & Views

The monthly economic barometer on the Swiss economy from the KOF Economic Institute again improved in February to 104.2 after a slight decrease in January (103.3).KOF analyzes that the barometer “continues its upward movements of the previous months and remains above its medium-term average”. It concludes that the positive outlook for the Swiss economy is reinforced. The improvement is mainly visible in demand side indicator bundles for the likes of consumption and foreign demand. Indicators on the production side are painting a more mixed picture. Manufacturing even showed a setback. Within manufacturing, particularly the sub-indicators for the metal industry and for paper and printing products are experiencing a setback. A more favourable outlook is exhibited by the sub-indicators for the electrical industry as well as for the textile industry. Aside from the KOF indictor, the Swiss State Secretariate for Economic affairs also released Q4 GDP data. GDP growth, adjusted for sporting events, grew by 0.2%, coming on the back of a 0.4% quarterly decline in the previous quarter. Activity was mainly supported by domestic demand. Private consumption rose a solid 0.4%. Construction investment (+1%) and investment in equipment also recorded significant growth. Goods exports rose 0.6%. Imports were 2.7% higher. The Swiss franc jumped again sharply higher today with EUR/CHF falling below the 0.91 big figure, a historic strong level except for the early 2015 spike. However, this move was probably mainly due to safe haven flows due to tensions in the Middle East rather than Swiss eco data.