Markets
European investors were unlikely to place high profile directional trades, lacking guidance from the other side of the Atlantic as US investors were absent for President’s day. Still, French president Macron announcing an agreement ‘in principle’ on a high level meeting between presidents Putin and Biden on Ukraine raised hope for the geopolitical risk-off to move a bit to the background. Maybe there was room for economic data to play a more prominent role. The hope proved not justified. The EMU preliminary PMI’s were not to blame. The January surveys brought an excellent bulletin on the post-Omicron health of the European economy. The composite PMI rose from 52.3 to 55.8, the highest level in 5 months. The services activity rebounded sharply (55.8 from 51.1) as restrictions are scaled back. The manufacturing PMI remained at a very solid 58.4. The latter also enjoyed some tentative relief of supply bottlenecks. Both services and manufacturing were supported by stronger demand/orders. This demand-driven rebound supported employment and wage growth. Companies are ever more passing higher energy and other costs to end consumers, leading to the sharpest rise in prices charged in the history of the survey according to Markit. Such a cyclical, demand-driven rise in inflation only reinforces the case for the ECB to prepare a substantial reduction in policy support when it meets on March 10. The European/German 10-y yield temporarily rose 4-5 basis points immediately after the open. However, headlines from Kremlin labeling a presidential meeting as premature and on new incidents at the Ukraine/Russian boarder soon reverted European markets into risk-off modus. The German curve flattens with the 2-y yield raising (+1.5bp). The 30-y eased 2 bps. Solid EMU PMI’s also don’t help peripheral bonds with the 10-y Italian spread widening 4bps. Greece was the exception to the rule (-3 bps). Major European indices nosedived after modest opening gains to currently lose up to 1.75%. The EuroStoxx 50 graph end last week already showed serious cracks. Breaking below the multiple neckline/4000 level is raising the red alert!
FX markets followed the broader intraday dynamics. EUR/USD touched an intraday top near 1.1390 upon the release of a strong French PMI. In retrospect, this only turned out to be a short-term opportunity to sell. The pair currently trades in the 1.1335 area. The DXY TW USD index also returned to the 96.00 level. The yen (EUR/JPY 130.20; USD/JPY 114.85), but especially the Swiss franc (EUR/CHF sub 1.04) paly their safe haven role. Sterling is also holding resilient, ceding little ground against the dollar (1.3610) and gradually gaining against the euro (EUR/GBP 0.833). EMU PMI’s were excellent but the UK February performance was even more impressive with the composite PMI jumping from 54.2 to 60.2. No reason at all for the BoE to backtrack on its intentions to normalize policy. CE currencies (PLN, HUF, CZK) again weathered the risk-off without any significant damage.
News Headlines
French Finance Minister Le Maire said tax cuts and subsidies will be used for as long as needed to protect consumers and companies from surging energy prices. The Macron government has earmarked some €15.5 bn to cap electricity and costs. Those measures will end early 2023, when regulated tariffs will be reviewed. But Le Maire figured it would be possible to stick to the pledge made by relying on stronger growth and more efforts to address structural weaknesses. The Finance Minister said Macron would do that by overhauling pensions and improve public-sector costs and efficiency if re-elected for another 5-year term in April.
Germany’s Bundesbank in its monthly report said the country tipped into a second Covid-driven recession. The economy contracted 0.7% q/q in the final quarter of last year and may decline “noticeably” in the first quarter of 2022. The BuBa said it’s not just the close-contact services sector that was hit by the restrictions. Pandemic-related worker absence as a result of the rapidly spreading Omicron mutation has also affected activity in other sectors. The Bundesbank does expect the economy to rebound rapidly (in the spring) and strongly thanks to still-strong demand and easing supply-chain pressures. Today’s German PMI release serves as a point in case.
