It’s a directionless, low-volume trading session in absence of US investors (President’s Day) and awaiting events later this week. For the record: German Bunds are broadly unchanged with UK Gilts outperforming (-4 bps for 10y). European stock markets trade near opening levels with both EUR/USD (1.0680) and EUR/GBP (0.8875) a tad softer. Later this week, we first of all look forward to global PMI’s. These could strengthen the picture that the global economy is actually showing much more resilient than feared. Second, to 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.
News & Views
Swedish headline inflation fell at the start of the year. January prices dropped by 1.1% m/m to be up 11.7% compared to the same month last year. CPIF, using a fixed interest rate, fell 1.3% m/m (9.3% y/y). Both measures printed below expectations. The Riksbank’s preferred gauge, however, did not. CPIF excluding energy unexpectedly rose 0.4% m/m (-0.2% expected) to be up 8.7%, quicker than in December (8.4%). Strong and stubborn (underlying) price dynamics are the reason the central bank delivered a 50 bps rate hike to 3% earlier this month with more hikes to come. The Riksbank penciled in a terminal rate of about 3.5% but that may not suffice according to swap markets. They expect the peak somewhere between 3.75-4%. Swap yields jump between 8.6-12.6bps across the curve. The Swedish krone strengthens from EUR/CZK 11.20 to 11.06 but remains weak historically. This is a (policy statement-official) source of concern for the Riksbank, since it fuels inflation further. This become obvious once more with the release of the meeting minutes today in which governor Thedeen stressed his desire for a stronger SEK, adding that it is important to also evaluate the actions of other central banks.
The Bundesbank in its monthly report said the economy shrink slightly in 2023 though added that it may fare a little better compared with the December forecast for a 0.5% contraction this year. The reasons for still anticipating a decline in GDP are subdued exports amid softer global demand, inflation weighing on consumption and construction sector momentum cooling. They offset the upside coming from an easing energy crunch and manufacturing bottlenecks dissolving. After a contraction in the first three months of 2023, bringing Germany in a technical recession, things will pick up slowly over the course of the year. The Bundesbank expects underlying inflation pressures to ease only slowly in coming months, warning that stronger wage deals will keep it elevated for some time through second-round effects.
Belgian consumer confidence continued its climb in February, rising from -12 to -8, the highest level since February of last year. In the space of four months, the confidence indicator has risen almost 20 points and is approaching its long-term average. Details showed broad-based strength except for a slight fall in savings intentions (1 from 3). Consumers expressed clearly more optimistic views on the trend in unemployment (16 from 27) and, to a lesser extent, the general economic situation (-13 from -18). Households also expect their financial situation to improve somewhat (-3 from -6). All sub-indicators express