Markets
The ECB delivered a hawkish surprise. The APP will wind down more rapidly with purchases of €40bn in April, €30bn in May and €20bn in June. Previously, those same amounts would have been bought in all of Q2, Q3 and Q4 respectively. On the condition data evolves as expected (ie inflation outlook does not weaken), net buying will end in the third quarter. This allows for a first rate hike in the fourth quarter. This ticks the box of a rate move taking place “some time” (changed from “shortly after”) QE ends. The decision implies that despite the fall-out of the war on European growth (slight downward revisions), upside risks to inflation (materially upgraded, especially near-term) dominate.
With US February CPI (7.9%) coming in exactly as expected, we had a clean view on what turned out to be a text book (bond) market reaction. The German yield curve bear flattened, adding 10.6-10.9 bps in the 2y-5y sector and 2.4 to 5.8 bps in the 30y and 10y. Real yields’ increase strongly outpaced the decline in inflation expectations. European swaps jumped up to almost 15 bps with, amongst others, the 2y and the 10y closing at new recovery highs. US yields added up to 5.3 bps at the belly in knock-on effects.
European stocks retreated more than 3% but already suffered long before the ECB policy meeting. EUR/USD briefly sprinted to 1.11+ but couldn’t maintain gains. The general risk-off outweighed interest rate support. The pair finished at 1.0986. Seeing some safe haven flows, the trade-weighted dollar bounced off 98 to 98.5. EUR/JPY eased sub 128. Euro vs sterling was more balanced with the couple sticking near to the 0.84 big figure. Oil on commodity markets continued to ease from multi-year highs though the pace eased. Brent finished at $109.33 per barrel. Dutch gas futures finished 19% lower.
Asian stock markets started the final day of the week on soft footing. The risk-off is inspired by yesterday’s European and to a lesser extent US performance rather than bad news hitting the screens. Most indices still trade 1 or 2% in the red though left behind intraday lows. China swapped losses for minor gains. Core bonds eke out a slight gain. The euro is better bid, the dollar trades mixed. EUR/USD is attacking the 1.10 big figure. The Japanese yen underperforms heavily. USD/JPY surged beyond recent highs to 116.65 – the strongest level since early 2017.
We expect the gently improving Asian sentiment to roll over into European dealings. It will dominate today’s economic calendar of secondary importance (US Michigan consumer confidence and UK industrial update). Signs are emerging that markets are looking past the war. Eg. yesterday’s failure in talks between Ukraine’s and Russia’s foreign ministers didn’t add to the negative sentiment. Risk-on bets may be dampened somewhat by the weekend lurking, but we hold a cautious optimistic bias on EUR/USD with the ECB now guarding its downside. First resistance situates at 1.104, followed by 1.1163/7. Core bond yields are protected by real yields bottoming out. We look for the European swap yields at the front and back end to hold and finish the week above the previous recovery highs.
News Headlines
The Czech Central Bank commented on February inflation which earlier was reported at 1.3% M/M and 11.1% Y/Y. The outcome was higher than the CNB winter forecast mainly due to food but also to higher administered prices as a result of growth in housing-related energy prices and rapid growth in fuel prices. Core inflation was slightly higher too, at 10.4% versus a 10.2% forecast. The CNB expected inflation to peak at around 10% in the first half of this year and return close to the 2% target in the first half of 2023. However, as a result of extreme price pressures due to the war in Ukraine and the koruna depreciating, inflation is very likely to record a further noticeable, albeit temporary, increase in the months ahead. Rusnok repeated he can’t rule out a slight rate hike at the March 31 meeting. At the same time, inflation will prevent the CNB from cutting interest rates near the end of the year.
