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European Market Update: Euro Zone Headline CPI At 4-Year High And At ECB Target But Core Inflation Remains Subdued

Euro Zone headline CPI at 4-year high and at ECB target but core inflation remains subdued

Notes/Observations

More hawkish Feb speak raises probability of March hike to over 80%

Euro Zone Feb Advance CPI Estimate of 2.0% is highest level since Feb 2013 while core remain subdued

Euro Zone Unemployment matches 8-year low at 9.6%

Overnight:

Asia:

Australia Jan Trade Balance misses expectations but still registers its 3rd straight surplus (+A$1.3B v +A$3.8Be

Japan Fin Min Aso noted that a wider US/Japan interest rate differential would cause USD/JPY pair to rise further

Japan PM Abe: Japan did not have defense spending cap of 1% of GDP

Europe:

France UDI Party (political ally) suspended support for Republican Party presidential candidate Francois Fillon

PM May lost a vote in House of Lords on amendment to Brexit bill (as speculated); Upper House voted to protect EU citizens’ rights in the UK (Vote was 358 to 256); MP’s will have chance to remove amendment when Bill returns to Lower House

Greece Official noted thatGreece and creditors concluded 1st round of talks. Had found common ground on some issue while disagreements remain in other areas

Americas:

Fed’s Brainard (Dove, voter): ready to increase interest rates soon because of the improvement in global conditions and continuous growth – Fed’s Kaplan (moderate, voter): reiterated Fed should begin process of gradual rate hikes

Economic data

(CH) Swiss Q4 GDP (miss) Q/Q: 0.1% v 0.4%e; Y/Y: 0.6% v 1.3%e

(DE) Germany Jan Import Price Index M/M: 0.9% v 0.5%e; Y/Y: 6.0% v 5.5%e

(MY) Malaysia Central Bank (BNM) left its Overnight Policy Rate unchanged at 3.00%; as expected

(ES) Spain Q4 Final GDP Q/Q: 0.7% v 0.7%e; Y/Y: 3.0% v 3.0%e

(ES) Spain Feb Net Unemployment M/M: -9.4K v +4.6Ke

(IT) Italy Jan Preliminary Unemployment Rate (beat): 11.9% v 12.0%e

(UK) Feb Construction PMI: 52.5 v 52.0e

(EU) Euro Zone Feb Advance CPI Estimate (in-line) Y/Y: 2.0% v 2.0%e (highest level since Feb 2013); CPI Core Y/Y: 0.9% v 0.9%e

(EU) Euro Zone Jan Unemployment Rate (in-line): 9.6% v 9.6%e (matches its lowest level since 2009)

Fixed Income Issuance:

(ES) Spain Debt Agency (Tesoro) sold total €3.43B vs. €3.0-4.0B indicated range in 2022 and 2027 Bonds

Sold €1.603B in 0.4% Apr 2022 SPGB; Avg yield: 0.487% v 0.532% prior; Bid-to-cover: 1.88x v 1.53x prior

Sold €1.834B in 1.5% Apr 2027 bond; Avg yield: 1.684% v 1.733% prior; Bid-to-cover: 1.42x v 2.95x prior

(ES) Spain Debt Agency (Tesoro) sold €948M vs. €0.5-1.0B indicated range in I/L 0.3% Nov 2021 bond (SPGBei;Bonoei); Real Yield: -0.674% v -0.620% prior; Bid-to-cover: 1.83x v 1.94x prior Oct 6th 2016)

(FR) France Debt Agency (AFT) sold total €6.995B vs. €6.0-7.0B indicated range in 2026, 2036 and 2066 Oats

Sold €3.622B in 0.25% Nov 2026 Oat; Avg Yield: 0.91% v 1.07% prior; Bid-to-cover: 2.75x v 2.09x prior

Sold €2.345B in 1.25% May 2036 Oat; Avg Yield 1.61% v 1.49% prior; Bid-to-cover: 1.81x v 2.00x prior

Sold €1.028B in 1.75%May 2066 Oat: Avg Yield: 2.14% v 2.02% prior, Bid-to-cover: 1.99x v 1.86x prior

(SE) Sweden sold total SEK750M in I/L 2022 and 2027 Bonds

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Index snapshot (as of 10:00 GMT)

Indices [Stoxx50 -0.2% at 3,381, FTSE -0.1% at 7,379, DAX -0.1% at 12,055, CAC-40 flat at 4,959, IBEX-35 -0.2% at 9,730, FTSE MIB flat at 19,363, SMI +0.1% at 8,644, S&P 500 Futures -0.1%]

Market Focal Points/Key Themes: European equity indices are trading mixed to lower consolidating yesterday’s gains after a raft of corporate earnings pre-market, and as political concerns in France weigh; markets jittery after French authorities decided to formally investigate conservative candidate Francois Fillon for misusing public funds; Eurostoxx weighed by shares of Anheuser Busch InBev and Deutsche Telekom after releasing their respective earnings results; shares of Engie the notable gainer in the index, also after releasing their results; Commodity and mining stocks providing some support in the FTSE 100 as copper prices consolidate near yesterday’s rally highs.

Upcoming scheduled US earnings (pre-market) include Abercrombie & Fitch, Autohome, Barnes and Noble, Burlington Stores, GCP Applied Technologies, Triple-S Management, JD.com, Joy Global, Kroger, Stage Stores, and Olympic Steel.

Equities (as of 09:50 GMT)

Consumer Discretionary: [Adecco ADEN.CH -3.9% (earnings, share buyback), Anheuser Busch InBev ABI.BE -2.6% (earnings), Capita CPI.UK -8.9% (earnings, CEO to step down), Continental CON.DE -0.9% (earnings), JC Decaux DEC.FR +4.0% (earnings), Jimmy Choo CHOO.UK +0.3% (final earnings), Merlin Entertainments MERL.UK -3.5% (earnings)]

Energy: [Hunting HTG.UK +1.3% (earnings)]

Financials: [Aldermore ALD.UK +4.6% (earnings), Hastings HSTG.UK +1.6% (earnings)]

Healthcare: [ALK-Abello ALKB.DK +3.1% (FDA approves Odactra for house dust mite allergies), Roche ROG.CH +5.2% (Phase III APHINITY study of Perjeta regimen meets primary endpoint), Spire SPI.UK +4.7% (earnings)]

Industrials: [Cobham COB.UK +3.5% (earnings, rights issue), Evonik EVK.DE +0.3% (earnings), Kion KGX.DE -0.1% (earnings), Subsea 7 SUBC.NO +11.7% (earnings)]

Materials: [LafargeHolcim LHN.CH +3.5% (earnings, share buyback)]

Telecom: [Deutsche Telekom DTE.DE -2.2% (earnings, €2.2B writedown)]

Utilities: [Engie ENGI.FR +6.3% (earnings, cuts dividend in 2017 and 2018)]

Speakers

Spain Fin Min de Guindos commented after Q4 GDP data that exports and consumers led growth in Q4. Believed 2017 GDP growth of 2.5% was guaranteed.

France Presidential candidate Macron: Would sell down €10B in govt stakes of French companies. Pledged massive effort for apprenticeships and cut labor costs

China Securities Regulatory Commission (CSRC) chairman Guo Shuqing: To strengthen supervision of the lending sector

Malaysia Central Bank Policy Statement noted that the current level of Overnight Policy rate (OPR) stance remained accommodative and supportive of economic activity. Headline inflation to be relatively high in H1 and growth momentum expected to be sustained during 2017. Risks to global growth remained and included threats of protectionism, geopolitical developments and volatility of financial markets

Currencies

USD maintained its firm footing and was supported by hawkish commentary by Brainard (dove and voter) who made it clear to the audience that the Fed was in a rate hike mood. Market likely to hear similar commentary when Vice Chair Fischer and Chair Yellen speak on Friday. Expectations for a Fed hike has risen over the course of the week from 30% to over 80% on Thursday

USD/JPY hit a 2-week high above 114.30 in the session aided by the widening of US-Japan interest rate differentials

EUR/USD drifted lower to test 1.0525 in the session. The higher headline CPI data for the Euro Zone did little to support the Euro as the core readings remain subdued and locked in the 0.8-0.9% raeneg since last May. Data still keeps sentiment that ECB will see the recent pick-up in headline inflation as transitory.

Fixed Income:

Bund futures trade at 164.95 down 6 ticks trading in the middle of today’s range, with price continuing to come off the February highs. Key resistance remains the 166.22 level. Downside momentum targets 164.10 initially followed by 162.50. A resumption higher targets 166.15 followed by 167.79.

Gilt futures trade at 128.08 up 28 ticks with volatility likely to increase due to futures rolling to the June contract this week. Resistance remains the 128.34 Monday high then 128.70. Support lies at 127.50 followed by 126.80 then 125.90.

Looking Ahead

05:30 (HU) Hungary Debt Agency (AKK) to sell Bonds (3 tranches)

05:30 (UK) DMO to sell £2.5B in 0.5% 2022 Gilts

05:30 (PO) Poland to sell Bonds

06:00 (IE) Ireland Feb Live Registry Monthly Change: No est v -3.5K prior

06:00 (PT) Portugal Jan Industrial Production M/M: No est v 1.3% prior; Y/Y: No est v 5.1% prior

06:00 (ZA) South Africa Jan Electricity Consumption Y/Y: No est v -1.0% prior; Electricity Production Y/Y: No est v 0.8% prior

06:30 (BR) Brazil Central Bank (BCB) Feb COPOM Minutes

06:45 (US) Daily Libor Fixing

07:00 (UR) Ukraine Central Bank Interest Rate Decision: Expected to leave Key Rate unchanged at 14.00%

07:00 (BR) Brazil Feb PMI Manufacturing: No est v 44.0 prior

07:30 (US) Feb Challenger Job Cuts Y/Y: No est v 45.9K prior; Y/Y: No est v -38.8% prior

08:00 (RU) Russia Gold and Forex Reserve w/e Feb 24th: No est v $393.6B prior

08:00 (SG) Singapore Feb Purchasing Managers Index: 51.0e v 51.0 prior; Electronics Sector: No est v 51.8 prior

08:15 (UK) Baltic Dry Bulk Index

08:30 (US) Initial Jobless Claims: 245Ke v 244 K prior; Continuing Claims: 2.06Me v 2.060M prior

08:30 (CA) Canada Dec GDP M/M: 0.3%e v 0.4% prior; Y/Y: 1.7%e v 1.6% prior, Quarterly GDP Annualized: 2.0%e v 3.5% prior

08:30 (US) Weekly USDA Net Export Sales

10:00 (DK) Denmark Feb Foreign Reserves (DKK): 459.0Be v 457.8B prior

10:00 (CO) Colombia Jan Exports: $2.7Be v $3.4B prior

10:00 (MX) Mexico Central Bank Economist Survey

10:00 (BR) Brazil to sell Fixed Rate 2-23 and 2027 Bonds

10:00 (BR) Brazil to sell 2017, 2019 and 2020 Bills

10:30 (US) Weekly EIA Natural Gas Inventories

11:00 (IS) Iceland Q4 Current Account (ISK): No est v 100B prior

12:00 (CA) Canada to sell 10-Year Bonds

13:00 (BR) Brazil Feb Trade Balance: $3.4Be v $2.7B prior; Exports: $14.7Be v $14.9B prior; Imports: $11.1Be v $12.2B prior

15:30 (MX) Mexico Jan YTD Budget Balance (MXN): No est v -503.7B prior

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