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Sunset Market Commentary


Core bonds licked their wounds after yesterday’s smackdown with UK gilts outperforming both US Treasuries and bunds. Gilts on Tuesday suffered a one-two-punch from a stronger-than-expected UK labour market report first and from the US CPI inspired global sell-off second. Yields today ease 4 (30-y) to 11.1 bps (2-y), erasing much of the 6.7-14.6 bps surge yesterday. A sub-consensus January inflation print initiated the move. CPI dropped by 0.6% on a monthly basis, double the 0.3% expectations. The yearly figure therefore unexpectedly matched December’s 4% instead of rising to 4.1%. Core CPI (5.1%) in a similar way defied the anticipated acceleration to 5.2% while services inflation rose less than feared, from 6.4% to 6.5%. Other (producer) gauges fell short of the bar as well. While none of the readings pave the way for some quick BoE easing, it did offer some relief to the gilt market. There were even some minor spillovers to US Treasuries. Yields of the world’s largest economy return up to 5.7 bps at the front end of the curve. This compares to the +20 bps rise (3-y) yesterday. From a technical perspective, rates hold north of the resistance levels breached on Tuesday. German yields decline about 2 bps across the curve. Euro area economic growth was confirmed to have stagnated in Q4 of last year. But separate data offer a glimmer of hope with industrial production having rebounded 2.6% in December after an upwardly revise 0.4% in November. Employment growth also picked up in the region, rising by 0.3% q/q and further accelerating from the 0.1% in Q2 and 0.2% in Q3.

The pound lags peers in the FX market. UK CPI helped EUR/GBP to avoid an imminent break to the downside where critical references at 0.8504 & 0.8492 were the last line of defense ahead of a technical wasteland that stretches to 0.834. The pair is currently trading around 0.8526. Cable (GBP/USD) is losing the 1.26 barrier again. Tomorrow’s GDP and Friday’s retail sales are to seal GBP’s short-term fate. The dollar catches a breather but the likes of JPY are unable to capitalize. USD/JPY holds above 150, triggering verbal interventions from at least three high-ranking Japanese officials. EUR/USD is flirting with the 1.07 big figure with a break looking like it could happen anytime.

News & Views

Several countries in the CEE region today published a preliminary release of Q4 2023 GDP growth. Growth in Hungary printed unchanged both Q/Q and Y/Y. According to the Hungarian Statistical office, ‘the economic performance rose mostly in sections agriculture, human health and social work activities and information and communication. The falls in industry, construction and some market services, mainly wholesale and retail trade, offset the growth’. Overall 2023 GDP was 0.8% lower than in previous year. When assessing whether or not to step up the pace of interest rate cuts, the MNB has to put a sub-trend economic growth and easing inflationary pressures against considerations of financial stability. The forint today weakens from EUR/HUF 377.1 to 389.4. Q4 2023 growth in Poland (details on Feb 29) at 0.0% Q/Q and 1.0% Y/Y was close to expectations. Growth in Slovakia in Q4 last year was reported at 0.3% Q/Q and 1.2% Y/Y, mainly supported by the Y/Y increase in investments. In summary for the whole year, the economic performance was driven by investments and a positive foreign trade balance. Final household consumption remained depressed. Total employment grew 0.1% Q/Q 0.3% Y/Y.

News agency Reuters, referring to Bundesbank data analyzed by the IW German economic institute, reports that German direct investment in China rose by 4.3% to a record of €11.9 bn last year. Investment in China as a share of Germany’s overall investments abroad rose to 10.3%, the highest level since 2014, while German direct investments elsewhere in Asia were stagnant at around 8%. Overall German foreign direct investment dropped last year to €116 billion from around € 170 billion in 2022 as its economy hovered on the brink of recession, the IW report is quoted. However, the data have to be nuanced as German investments in China in the last four years were financed entirely by reinvested profit and companies have also withdrawn capital. IW economist Juergen Matthes also indicated that one can assume a split between a few big companies and the majority of small and medium-sized companies enterprises with anecdotic evidence suggesting that the latter group is seeking to reduce their engagement with China or even to reduce it entirely. The study illustrates the dilemma German trade policy is facing as it ponders how to manage to risk of its economic exposure to China, its most important trading partner.

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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