EMU PMI’s provided the first real (sentiment) update on consequences from the Russian invasion in Ukraine. The official setback was smaller than feared in March. The composite number fell from 55.5 to 54.5, with the decline more or less similar in the export-oriented manufacturing sector (57 from 58.2) and the domestic services industry (54.8 from 55.5). Details nevertheless showed that a boost to demand from the further reopening of the economy from Covid-19 restrictions offset the economic impact of the Russian invasion. It’s worth mentioning that companies grew increasingly concerned about the outlook. Chief Business Economist Williamson at S&P Global, responsible for the PMI release, warned for the risk of the eurozone falling into decline in the second quarter given that the short term Covid-rebound will fade. Other dark details from the upbeat headline print include aggravated price pressures because of the war, leading to record inflation rates for firms’ costs and selling prices, which will inevitably feed though to higher consumer prices in the months ahead. Today’s response on FI markets confirms our view that investors turned a page. Central bank’s focus is on inflation (expectations) with markets aware that this stance will come at a price for the economy. Yesterday’s rebound of core bonds proved again short-lived. The US yield curve bear steepens with yields adding 4.1 bps (2-yr) to 8.2 bps (30-yr). German yields add up to 7.5 bps with the belly of the curve underperforming the wings. Stock markets and oil prices trade volatile near opening levels. EUR/USD is still toying with the 1.10 big figure. UK and US PMI contrasted with the EMU release. In the UK, a rebound in services more than offset a setback in manufacturing. Details were nevertheless in line with the EMU gauges. In the US, both subindices contributed to a surge in the composite PMI to the highest level in 8 months. The feared impact of the (European) war is obviously smaller, but the outlook nevertheless weakened as well.
The ECB today announced a timeline setting out the steps to phase out the temporary pandemic easing measures with respect to collateral that were introduced in April 2020. The phasing out will occur in three steps between July 2022 and March 2024. Amongst others, measures that are scaled back are a temporary reduction in collateral haircuts. The ECB also no longer will maintain the eligibility of marketable assets that initially fulfilled minimum credit quality requirements but whose credit ratings subsequently deteriorated below the minimum credit quality. However, the ECB continues to allow NCBs to accept as eligible collateral Greek government bonds (GGBs) that do not satisfy the Eurosystem’s minimum credit quality requirements but fulfil all other applicable eligibility criteria, for at least as long as reinvestments in GGBs under PEPP continue.
The Norges Bank raised its policy rate from 0.50% to 0.75%. The Norwegian economy continues to recover while price and wage inflation has been higher than expected. The war in Ukraine contains risks of both lower growth and higher inflation. Due to capacity constraints and global price pressures the NB is concerned about higher wages and prices. It raised the path for its policy rate forecast and now sees policy rate at 2.5% end last year versus 1.75% end 2024 in the December forecast. The NB also signaled that a next rate hike in June is likely. The Norwegian krone touched a new correction low near 9.45, but this move was also supported by a persistent high oil price.
The Swiss National Bank left its policy rate unchanged at -0.75% and no change is imminent. Inflation is expected to rise temporary to 2.2% Y/Y in Q1 and Q2, but will return to an average of 0.90% in 2023/24. The SNB sees the franc has highly valued and is willing to intervene in the FX market as necessary. However, it takes into account the overall currency situation and the inflation rate differential with other countries. A favourable relative cost development versus trading partners mitigates the need of an aggressive intervention policy in case the rise of the franc stays modest. The Swiss franc today gained modestly further to trade near EUR/CHF 1.0225.