Markets
The ECB updated its wage tracker, published a first time after last December’s policy meeting. The headline indicator’s path is broadly unchanged with wages expected to remain sticky in Q1 and Q2 of this year (4.9% Y/Y and 4.5% Y/Y respectively) before “collapsing” in the second half of next year to 2.2% Y/Y in Q3 and 1.5% Y/Y in Q4 (marginally up from 1.4% in December). Just like January CPI’s on Monday (marginally above consensus) they won’t really move the needle in the ECB’s compass. That leaves Friday’s staff paper on neutral rates as the one to watch. The pre-pandemic 1.75%-2.50% for R* risks seeing a higher bottom with implication on the central bank’s policy path beyond the expected 25 bps rate cut in March (to 2.5%). If any, it suggests that the current implied market rate bottom by year-end (1.75%) is too low. While being at the topic of the ECB, it’s maybe worth mentioning an article published today at the central bank’s blog titled “What happens when US and euro area monetary policy decouple?”. The authors conclude that spillovers from US monetary policy initially work in the opposite direction to ECB monetary policy, but then later in the same direction. For instance, a surprise tightening of US policy leads to an initial increase in euro area inflation (on average over the three months after the announcement) as the euro weakens. However, over time, tighter US monetary policy drags down euro area inflation much like tighter ECB policy would. The blogpost thus suggest that the ECB should hold its nerve and look through the initial inflationary impact in such scenario. Markets didn’t respond to the ECB data releases, but interest rates did show sensitivity to comments from ECB chief economist Lane. He warned that the inflation slowdown might take longer than thought and that the ECB must avoid moving too slowly, to avoid hurting the economy, or too quickly as new upside inflation risks might emerge. The comments, coming from a known dove on the ECB board, caused an underperformance at the front end of EUR rate curves, which erased daily losses of up to 5 bps to currently trade flat on the day. The euro failed to profit, trading flat in the 1.04 area. US eco data lost importance at the volatile start of Trump 2.0 especially since Fed governors collectively steer in the direction of a prolonged pauser to counter any inflationary risks. January ADP employment change showed another solid 183k job gain (vs 150k expected) including an upward revision (176k from 122k) to December data. The US services ISM is up for release later today. General risk sentiment turned again somewhat more sour with (very) long core bonds profiting the most. First questions are being raised over whether the US economy will be able to weather the president’s explosive policy mix.
News & Views
Czech retail sales unexpectedly showed strong momentum at the end of 2024. Retail trade (except motor vehicles) in real terms rose 1.2% M/M and 6.2% Y.Y. In a monthly perspective, sales growth was rather broad-based with non-food sales up 1.5%, food sales adding 1.1% and sales of automative fuels rising by 0.2% M/M. For the whole of 2024 sales in real terms were 4.6% higher compared to 2023. The Czech Statistical Office indicated internet and mail-order houses as the biggest contributor of overall sales. The substantial overall Y/Y rise is partially due to a lower comparison base in 2023, but suggests that domestic demand has regained traction. Tomorrow, January Czech CPI data will be published while the Czech National Bank announces the outcome of its monetary policy meeting. The CNB is largely expected to further reduce/finetune its policy rate from 4% to 3.75 after having taken a pause at the December meeting. At EUR/CZK 25.13, the koruna extends a short-term rebound after declining due to overall uncertainty on global trade/US tariffs on Monday.
The National Bank of Poland kept its policy rate unchanged at 5.75%. The decision occurred as the communication from MPC members recently suggested some growing internal debate on how long the current status quo in the policy rate will have to last. Governor Glapinski advocated a higher-for-longer stance as inflation remains well above target and as the government is removing price caps on energy, likely keeping inflation at elevated levels throughout the end of this year. However, other MPC members suggested that the MPC might consider debating rate cuts later this year considering the overall outlook on inflation. At EUR/PLN 4.20 the zloty is trading at the strongest levels against the euro since April 2018. The NBP will publish its policy statement after finishing this report.