Global markets today took a breather after yesterday’s sharp repositioning. At his hearing before the Senate, Fed Chair Powell admitted that rates most likely will have to be raised further than assumed in the December dots. Persistent stronger activity/demand and stubbornly high services inflation also force the Fed to reconsider stepping up the pace of rate hikes from 25 to 50 bps, conditional to this week’s labour market and next week’s inflation data. Today’s ADP report at least didn’t show the cooldown in the labour market the Fed is looking for. After a slightly slower net private sector job growth of 119k in January, growth at 242k returned toward the post-pandemic average. After finishing this report, the JOLTS job openings data will provide further insight on labour market tightness. For now, the direct impact of the ADP report markets was limited. Investors apparently don’t trust the link/correlation between ADP and Friday’s official payrolls. US yields this morning tried to build on yesterday’s move with the US 2-y yield extending its journey north of 5.0%. However, the upside momentum gradually ebbed. US yields in a daily perspective are changing between 2.5 bps (2-y) and 5.5 bps (10), further inverting the yield curve. At 108 bps, the negative difference between the US 10 and 2-y yield currently the steepest since 1981 (Volcker era). European/German yields, which didn’t follow the US move yesterday, this time also didn’t try a catching up move. In a similar inversion move, the German 2-yield gains 1 bp while 10 & 30’s are ceding 6 bps. Remarkably, (10-y) intra-EMU spreads versus German remain a place of calm despite recent sharp rise in core yields. The Italian/German yield spread today even eases 5 bps. Even as the steep curve inversion is widely seen as a harbinger of a recession further out in time, European and US equities today again avoid further losses (Euro Stoxx 50 +0.2%). The S&P 500 opens little changed.
On FX markets, the dollar is losing marginally after yesterday’s rally (DXY 105.60, EUR/USD 1.0545, USD/JPY 136.9) awaiting more high profile news to attack nearby resistance (e.g. EUR/USD 1.0484; USD/JPY 138.17). Sterling is holding a tight range near the EUR/GBP 0.89 pivot. New BoE MPC member Dhingra in a speech warned that the BoE might overtighten when raising rates further, risking to damage an already weak economy.News Headlines
Hungarian inflation decelerated in February for the first time in a year and a half. Headline prices rose 25.4% y/y (0.8% m/m) compared to 25.7% in January. Core inflation rose 25.2% compared to one year ago, the same as in January. Registering the highest increases were electricity, gas and other fuels (49%), closely followed by food (43.3%). Service charges were up by 11.6%. The Hungarian central bank core inflation gauges vary between 19.3% and 25.1% y/y with two out of the three measures still higher than last month. Despite headline inflation showing very premature signs of topping, the central bank plans to keep policy tight for the time being by leaving the overnight tender rate at a whopping 18%. In this regard, MNB deputy governor Virag in a speech before parliament today said the MNB will continue to carry out “disciplined policy”. In stealthy criticism to the government’s spending and price cap policies, he also said that “all” economic policy should serve to reduce inflation. MNB president Matolcsy, also appearing before parliament, put it a tad more bluntly, saying that the central bank is at odds with the government. “It’s easy to spoil” the situation, but harder to “amend” it. The quotes triggered more volatility in the forint than the CPI number did. EUR/HUF briefly rose above 380 before paring gains back to 379.69 currently.
Riksbank’s First Deputy Governor Breman is worried that it may take longer to get Swedish inflation back to target than earlier expected. She’s seeing signs of an economic slowdown and demand weakening, but the question is how much demand actually needs to ease before the effect is visible on inflation. The Riksbank hiked by 50 bps to 3% in February and guided markets towards further hikes in the near future. Breman said she’ll most likely support another 25 or 50 bps rate hike in April. Swedish money markets meanwhile have adjusted their terminal rate expectations to 4%+. Given the ECB will probably at least match that level, the relative interest rate support for the SEK is limited. At 11.27 currently, EUR/SEK is trading near recent multiyear highs.