Tue, Mar 28, 2023 @ 15:25 GMT
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Main Focus for Markets Remains on Tomorrow’s US CPI Release


On Friday, markets gradually moved further in the direction of central bankers holding rates higher, at least for a bit longer. We don’t draw any firm conclusion yet, but also the persistent trend of further inversion of the yield curve that dominated (US) interest rate markets of late at least took a breather. US yields gained between 3.5 bps (2-y) and 8.9 bps (30-y), with higher real yields driving the move. Eco data were few. Consumer confidence of the U. of Michigan improved from  64.9 to 66.4, but according to the University recent developments have led to mixed attitude among consumers as sentiment remains well below the historical average. Consumers’ inflation expectations for the next 12 months also rose from 3.9% to 4.2%. Earlier, the US BLS, amongst others, also upwardly revised inflation data for the last three months of last year. Fed’s Harker advocated to raise the policy rate above 5.0%, but at the same saw a chance of the Fed engineering a soft landing. German yields rose between 7.0 bps (5-y) and 5.1 bps (30-y). Equities initially traded in risk-off modus, probably at least partially due to Russia announcing another 500k b/month oil production cut starting in March (EuroStoxx50 -1.23%). Sentiment improved later in US dealings with indices closing mixed (Dow +0.50%; Nasdaq -0.61%). The dollar continued its rebound, even as the pace of the rally slowed as the session continued. Still, EUR/USD closed at 1.0678 (from 1.0739). The yen initially strengthened sharply on headlines that Kazuo Ueda likely would become the new BOJ governor. However, initial speculation on a big policy change evaporated soon. USD/JPY closed only modestly lower at 131.36. Sterling also gained slightly further against the euro (close EUR/GBP 0.8853).

Most Asian markets are starting the week in, admittedly mild, risk-off modus (Nikkei -0.88%, S&P/ASX 200 -0.21%; CSI 300 +0.84%). With little hard economic news available this morning, geopolitical noise (US again shot down an unidentified object above its territory) captures investors’ attention. The DXY index gains modestly (103.69) mainly driven by a further rebound in USD/JPY (132.15). EUR/USD trades little changed at 1.0675. Later today, the economic calendar is almost empty, with the European Commission economic forecasts the exception to the rule. An modestly better economic outlook gives the ECB more room to keep its focus on inflation. However, the main focus for markets remains on tomorrow’s US CPI release. Recently, markets tentatively grew a bit more concerned that persistent core/services inflation might cause the disinflationary process to develop more slowly than initially hoped for. If confirmed, this might put a floor for global core yields. Money market yields now discount a Fed cycle peak rate near 5.20%. The US 2-y yield regained the 4.5% barrier. Markets gradually shifting towards the higher for longer Fed interest rate scenario also supports the USD rebound. EUR/USD decisively dropped below the 1.0735 previous top. 1.0461/84 (38% retr. since Sept/YTD low) is next support.

News Headlines

Germany’s SPD lost the state elections in Berlin to the CDU. According to projections, the party of Chancellor Scholz gathered only 18.4% of the votes, down from 21% and about the same as the Greens. The CDU party soared more than 10 ppts, securing 28.2%. This does bring no guarantee about a CDU-led government coalition though as it lacks support from the other parties. Instead, if the SPD’s current leader Giffey can’t hold on to power, she could be replaced by someone from the Greens in a redo of the 2016 three-way coalition together with the Left Party. The Berlin state elections were a rerun of the 2021 edition that was so chaotic its results were annulled by the city’s top court.

Hungarian central bank Deputy Governor Virag said patience is warranted on the timing of a first rate cut in the quick deposit tender rate (the de facto policy rate) of 18%. Data on Friday showed inflation in the country soared to 25.7% in January, the fastest in the EU. Virag in an interview with Napi.hu published this morning said that double-digit services inflation should make those expecting a collapse in prices “cautious”. Before the bank starts cutting the 18%, there is also progress needed in unlocking the EU funds and the current account deficit needs to improve. Reducing the official benchmark rate of currently 13% is “not on the horizon”, he added. Risk off and the inflation release pushed the Hungarian forint back to EUR/HUF >390 on Friday before paring losses back to 387 in the close.
KBC Bank
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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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