Markets
Technical levels prevailed on Friday during US trading hours. A strong repositioning drive pulled core bonds lower since the release of January US payrolls. Markets are finally embracing the idea that policy rates will peak at higher levels and remain there for longer. ECB Villeroy for the first time implicitly put forward 4% as potential end zone (“peak by September”; “slowing down pace after March”). Both the German 10-yr and US 10-yr yield tested important resistance, respectively at 2.55% (2022 high & 62% retracement on 2008/2020 decline) and 3.9% (neckline double bottom formation). Ahead of the long US weekend (markets closed for President’s Day), markets lacked the drive to already force the break higher. US yield eventually declined by 4-5 bps across the curve with the front end underperforming (2y: -2.3 bps). German yields dropped between 0.4 bps (2-yr) and 4.3 bps (30-yr). Technical pictures now even suggest some short term trend reversal with a bearish engulfer on the German 10-yr chart and a (sort of) inverted hammer on the US 10-yr chart. From a data point of view, this week hasn’t that much to offer to nevertheless extend the upleg in yield, though we see some opportunities. First of all via tomorrow’s global PMI’s. Those could strengthen the picture that the global economy is actually showing much more resilience than feared. Second, via Wednesday’s FOMC Minutes. Last week’s “coming out” of Fed governors Mester and Bullard suggested that the early Fed decision to downshift the pace of rate hikes from 50 bps to 25 bps wasn’t so unanimous after all. Both argued in favour of sticking to 50 bps and will do so again in March. Minutes could show how big the hawkish minority within the Fed already was ahead of the January data releases (stellar payrolls, stubborn inflation and strong retail sales). The Fed’s preferred PCE deflators on Friday are this week’s final data point, though there direction is probably known given this month’s earlier CPI prints. The US Treasury’s end-of-month refinancing operation (2y-5y-7y) and central bank speeches serve as wildcards.
As US yields hit resistance, the dollar lost momentum on Friday as well. EUR/USD last week dropped out of the upward trend channel in place since November. The pair set a new short term low at 1.0613 before closing at 1.0695 with a technical hammer formation suggesting some short term improvement ahead. We think that the pair will rapidly run into resistance near 1.0750 though. EUR/GBP holds just narrowly below the 0.89 big figure, but the uptrend in the pair remains firmly in place.
News and views
Czech National Bank vice governor Jan Frait in an interview with daily DenikN indicated that no rate cuts will be discussed that the CNB policy meetings of March and May. If the economy actually develops in line with the CNB’s forecast, the central bank might consider whether it can cut rates in the third quarter of the year. However, Frait warned that this is already a far distant horizon which contains a high degree of uncertainty. Even in such a scenario, Frait assessed that interest rates will have to stay relatively high for a longer period of time. In assessing the options for monetary policy, the CNB will keep a close eye at the development in the real estate market. Higher core market rates last week’s caused the Czech krona to ease off a multi-year top against the euro. Even so, at EUR/CZK 23,7, the Czech currency continues holding strong.
Rating agency S&P affirmed the Polish A- long term credit rating (stable outlook). S&P assesses that the discontinuation of some energy-related tax cuts by the Polish government will probably result in a lower 2023 fiscal deficit than initially anticipated. The government might stabilize the general government debt to GDP ratio at around 45% in the coming years. S&P also mentions Poland’s competitive and diversified economy as well as strong external and public balance sheets to help mitigate the negative consequences of the war. S&P expects inflation to peak around 20% in February and average 12.9% this year and 6.2% in 2024, above the NBP’s 2.5% (+/- 1%) inflation target. The zloty over the previous weeks underperformed the forint and the Czech koruna, but last week resisted the impact of higher core yields rater well holding near EUR/PLN 4.76/4.77.
