Markets
The postponed German inflation figures were key for setting the mood even before the European open. Prices rose 0.5% to be up 9.2% y/y in a further deceleration from December (9.6% y/y). The numbers are extremely difficult to interpret due to basket changes, various government support measures and regular re-pricings of energy contracts. Data crunchers meanwhile figured out that the estimate Eurostat used for calculating the European figure is probably less than the actual German figure, creating upside risks for the final HICP release on February 23. But markets only paid attention to the fact that the outcome undershot analyst expectations (for 1.3% m/m and 10.0% y/y). Even a hawkish Riksbank was disregarded (see below). Equities cheered. The Euro Stoxx 50 advances 1.2% and is less than 4% away from the previous recovery high from 2021. Core bonds gained with Germany outperforming the US – though that balance could even out a bit if tonight’s $21bn 30-year auction even remotely resembles the stellar 10-year sale yesterday. German yields drop 4.1 (2y) to 6.8 bps (10y). US yields rise 1.7 bps at the front and lose less than 3 bps at the long end of the curve (10y-30y). The US 10y-2y curve inversion hit a new multi-decade extreme. The US dollar suffers, with the bullish sentiment to blame. DXY drops below the 2020 pandemic high to 102.66. EUR/USD surpasses 1.0735 to test next resistance at 1.078/08.
Several members of the Bank of England’s MPC appeared before Parliament today. Bailey insisted inflation has turned the corner and that there will be a “very powerful unwinding” of inflation this year, in part thanks to base effects. However, he said that inflation forecasts carry the largest upside skew ever. Risks for more persistent inflation come from the strong and still-imbalanced labour market and public sector pay rises if they are funded through government borrowing. Haskel revived BoE guidance that was omitted from the February statement which stated that if inflation is more persistent, the central bank will act forcefully if necessary. He also downplayed the relevance of medium term inflation forecasts which show price growth slightly below the 2% target. Pill struck a balanced tone. The chief economist sees an extended period of weakness in the UK with first signs of loosening in labour market. While there is no room for complacency, he said, the BoE must also guard against raising interest rates too sharply. UK gilt yields trade flat to -6.5 bps lower today in a move that has more to do with the general trend rather than the BoE testimony. Sterling has a decent run, banking on the risk-on sentiment. EUR/GBP is currently testing 0.885/6 support (38.2% retracement on the 2022 bull run), down from 0.8875 at the open.
News & Views
The Riksbank as expected raised its policy rate by 50 bps to 3.0%. Contrary to the guidance end November, today’s hike won’t be the last. In addition to a prolonged hiking cycle, the RB will accelerate the reduction of its balance sheet by actively selling government bonds starting in April. A more decisive monetary policy approach is needed, as inflation in Sweden at the end of last year remained very high (> 10%), mainly due to energy prices. However, even core inflation is higher and rising. Both activity and inflation are expected to cool this year, but it is uncertain whether (underlying) inflation will fall sufficiently quickly and far, especially as a weak krona complicates the RB’s efforts. The RB sees at least one additional rate hike in spring and expects the policy rate to stay at the peak level throughout the policy horizon (Q1 2026)! After strengthening to a multi-year high at EUR/SEK 11.44 earlier this week (even slightly above the 2020 corona panic level), the prospect of further tightening and the RB advocating the desirability of a strong krone, pushed EUR/SEK back to currently 10.14.
Inflation in Brazil eased marginally in January to 0.53% M/M and 5.77% Y/Y (was 0.62% M/M and 5.79% Y/Y in December). In a monthly perspective, price rises were still broad-based with food and beverages rising 0.59%, transport 0.55% and household goods up 0.7%. While easing, inflation in 2022 stayed above the CB’s annual target of 3.5% +/1.5% tolerance. This year’s target stands at 3.25% +/- 1.5%. The government recently criticized the CB for its high policy rate (13.75%). With inflation still above target and the Central Bank seeing upside risk to inflation due to a supportive fiscal policy, rate cuts are unlikely any time soon. The real trades little changed near USD/BRL 5.18.
