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Japanese Inflation Keeps Rising

Market movers today

Today, we get the final Q4 GDP data from Germany but otherwise it should be a quiet day in Europe.

During US hours it gets a bit busier as the January data on personal spending and new home sales is released.

In the central bank calendar, we have ECB’s Nagel and a flurry of Fed speakers on the wires.

The 60 second overview

It has been a mixed picture on the Asian markets this morning on the back of the Japanese inflation and the hearing at the lower house from BoJ governor nominee, Ueda.

Japan’s inflation accelerated to a four-decade high. Core inflation, which excludes volatile food prices, climbed to 4.2% y/y in January on the back of rising import costs. However, it was broadly in line with consensus estimate and hence market reaction for USD/JPY was rather subdued. USD/JPY still trading in the 134-135 range.

Ueda’s comments were pretty much a non-event for markets. He took a cautious stance and remained neutral. If anything his comments were a bit to the dovish side, as he finds it “appropriate to continue monetary easing measures”. Hence, Ueda supported current BoJ governor Kuroda’s dovish stance. Kuroda thinks that current inflationary pressures will fade and they are not sustainable enough to reach a stable 2% inflation target. In other words, inflation is transitory (heard that one before?).

Euro area inflation for January was revised up as expected, following the inclusion of the delayed German data. The revision was 0.1 percentage points for both headline and core inflation, to 8.6% and 5.3% y/y, respectively. Attention now turns to the February data due next week.

The Central Bank of Turkey (CBRT) cut its policy rate by 50bp to 8.5% yesterday, which was less than consensus expected (100bp). Quite surprisingly, the CBRT also re-introduced the word ‘adequate’ when describing the current monetary policy stance in the statement, signalling that further rate cuts for now are less likely. The CBRT already had a dovish bias before the earthquakes hit Turkey as they had just removed the word ‘adequate’ from their previous monetary policy statement, and after the quakes, some market participants were even expecting a 150bp cut. TRY was stable after the decision, perhaps reflecting that the cut was less than expected, but there are also several government support measures for lira in place. Also worth noting, while the official policy rate is at 8.5%, banks have to offer a substantially higher (>30%) interest rate for their client deposits because they face a penalty if the share of their lira deposits falls too low. As long as Turkey continues to foster unorthodox economic policies, maintaining an artificially strong currency and cutting rates in a high inflation environment, imbalances will continue to grow and the risk of a currency crisis, even if not acute, remains.

FI: Global bond yields declined yesterday and the curve continued to invert from the long end despite higher than expected prices in the revised GDP data for Q4 and a better than expected national activity index. The decline in yields was driven by a combination of an index extension next week in the US treasury market and that fact that the next bond auction in the US Treasury market is not until March 7, so there will be no supply when the duration on the index is increased at the end of the month.

FX: Spot moves have been rather limited over the last 24 hours with most notably several events out of Japan failing to do much to the JPY even if the Japanese currency has benefited from the slight setback to global yields. PLN and NOK have been the recent outperformers with especially NOK enjoying higher oil prices. EUR/SEK keeps hovering above the 11.00-mark while EUR/USD trades close to 1.06.

Credit: It was a relatively quiet day in credit markets yesterday and CDS indices held mostly steady; iTraxx Main was unchanged at 80bp while Xover tightened slightly by 4bp to 415bp. The primary market saw deals from US apparel company VF Corporation as well as a senior preferred bond from the Italian lender Banca Monte dei Paschi di Siena.

Nordic macro

The Swedish NIER releases its monthly survey at 09:00. Consumers remain extremely downbeat about their own economy but also the economy as a whole, although the latest surveys suggest levels have stabilised and even picked up somewhat. Construction remain in the doldrums as well and here the arrow points south. Retail is extremely weak too, whereas manufacturing has held up relatively well, though on the verge of dropping below 100, the cut off between growth and slowdown. Price plans are perhaps even more interesting. As Per Jansson mentioned in the Minutes he is worried about the fact companies’ price plans except for the construction sector remain at elevated levels and indicate that unusually many of them still plan to increase prices going forward which “highlights the risk of companies changing their pricing behaviour.”

Danske Bank
Danske Bank
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