Today’s trading session started with a bang: national European inflation numbers triggered a fresh sell-off on bond markets. French inflation (EU harmonized) accelerated to 1% m/m with the y/y-reading printing at a new high of 7.2% (vs 7% in January). Details showed positive contribution from all categories, with food prices (1.4% m/m & 14.5% y/y) and energy prices (1.6% m/m & 14% y/y) standing out. Services inflation rose to 0.7% m/m (2.9% y/y). Spanish inflation increased by 1% m/m as well with the y/y-reading picking up from 5.9% to 6.1% (vs 5.7% expected). Underlying core inflation printed at a new high of 7.7% Y/Y. Belgian inflation yesterday also showed record high core inflation (8.28% y/y). Stubbornly high inflation won’t allow central banks to end policy tightening cycles any time soon. On the contrary. ECB chief economist Lane this morning elaborated on the topic. He didn’t zoom in on how high the ECB policy rate peak eventually will be, but said that rates will remain at that level for quite a long-lasting period, adding “a fair number of quarters”. Combining with ECB Villeroy’s earlier (and later downplayed) comments that policy rates would only peak in September, and assuming a continuous tightening pace this implies a policy rate peak of at least 4% which would still be in place by mid-2024. Despite markets’ hawkish repositioning already done of late, that strengthens our view that moves could go further. Guidelines at March Fed & ECB policy meetings (including new forecasts) will be crucial here. German Bunds significantly underperform US Treasuries with yields adding 7 to 8 bps across the curve. The German 10-yr yield breaks above key 2.55%/2.57% resistance (previous cycle peak & 62% retracement on decline between 2008 & 2020). If confirmed, the break in first instance implies more upward potential to 3% (2005 low). 76% retracement (3.38%) and the 2011 top (3.5%) are the next references. US Treasury yields increase by up to 2.5 bps ahead of the US morning releases (including consumer confidence). The fierce bond sell-off pushed European stock markets around 0.5% lower at the start, but equities/risk sentiment again showed resilience. They currently record small gains. The single currency tries to benefit from the situation (yield advantage & risk climate), but its performance is disappointing. EUR/USD changes hands around 1.0620, coming from an intraday low just above 1.0580. Sterling outperformed after EC President von der Leyen and UK PM Sunak presented the Windsor Framework, as solution to fix the Northern-Ireland Protocol in the brexit deal. Sunak now needs to sell the deal to the Northern Irish DUP party. We retain hawkish comments by BoE Mann as well who warns that cheaper energy prices risks pushing up core inflation as households have more income disposable for non-energy spending. EUR/GBP drops from the 0.88 area to currently 0.8760. Next support stands at 0.8722.
Swedish GDP decreased 0.9% Q/Q in Q4 2022. The decline was mainly driven by a decline of capital formation in fixed assets (-0.8%). Household consumption decreased 0.2% Q.Q. Changes in inventories contributed negatively to GDP growth by 0.7% ppts. Government consumption rose a 0.2%. Exports decreased 1% and the contribution of net exports to growth was negligible. Weaker growth figures might complicate the Riksbank policy. The Swedish central bank raised its policy rate by 50 bps to 3% earlier this month and indicated further tightening will be needed as inflation remains unacceptably high. Markets expect another 50 bps increase in April. The weak krone became a factor of importance in the RB’s policy assessment. The krone rebounded from a cycle peak near EUR/SEK 11.40 after the February decision, but cedes ground after the GDP data (11.08 from 11.01).
The National Bank of Hungary left its policy rate unchanged at 13%. The key overnight rate deposit rate stays at 18%. Ahead of the meeting, markets were looking for guidance on when the MNB might start reducing the gap between the overnight rate and the Base rate. The MNB didn’t give any concrete hints but the statement was different from last month. The MPC indicates that ‘maintaining market stability and strengthening monetary policy transmission are also key to achieving price stability. The MNB continues to focus on trend-like developments in financial market conditions. Therefore, the Bank takes into account the persistence of the recent improvement in risk perceptions when setting the conditions of overnight instruments introduced in mid-October’. The forint temporary lost marginal ground on the publication of the policy statement but currently trades little changed near EUR/HUF 378.