Markets
German Bunds for the first time this week gained yesterday, halting a downward spiral triggered by rising inflation risks in wake of the Iranian conflict. The front end outperformed, shedding up to 2.5 bps. Longer maturities were still up by 1.5 bps. Treasuries similarly entered calmer waters but underperformed vs Bunds in the wake of a much better than expected services ISM. The headline surged to a 3.5 year high of 56.1 (from 53.8 and vs 53.5 expected) on new orders growing significantly faster (58.6 from 53.1) and employment picking up (51.8 from 50.3). The price component eased from 66.6 to 63, a one year low. US yields rose between 3 (30-yr) and 4.4 (3-yr) bps. Risk sentiment was outright positive with geopolitical concerns, at least temporarily, moving to the background. Energy is probably the best gauge. Gas prices not only fully pared a 15% higher open, they finished 10% lower compared to Tuesday’s close. Oil prices in Asian dealings neared the $85 barrier only to end around $81.4. The jury remains out on whether it had something to do with the Trump administration’s assurances to keep energy trade flowing in the Strait of Hormuz or a later-denied-by-Iran report that the country indirectly contacted the CIA to discuss terms for ending the war. We’re in any case wary for oil (and gas) prices to drop significantly so long the war rages. Oil storage sites in key producers such as Iraq are filling up rapidly, leading them to cut or even completely halt production. The daily détente in energy prices caused relief in stock markets too, particularly in Europe. The EuroStoxx50 rose 1.7%. Wall Street added up to 1.3% (Nasdaq). It’s this risk-on mood that prevented the US dollar from benefiting from favourable yield differentials. Earlier haven flows reversed, pushing the greenback marginally lower against the euro. EUR/USD held north of 1.16. DXY dipped back below the 99 barrier. USD/JPY’s mid-February ascent hit resistance around 158. Sterling tread water around EUR/GBP 0.87.
Trading remains very much headline-based in the current circumstances. This morning is another case in point. The Iranian commander of the military ground forces said that the country hasn’t closed the Strait of Hormuz. They “don’t believe in [that] at all.” It prompted an intraday pullback in oil prices. They were again headed for the $85 barrier but are now trading around $83.5. Concerns about supply are now also triggering preservation measures by China, which told its biggest refiners to suspend diesel and gasoline exports. We continue to look at these markets to gauge overall market sentiment. Stock futures suggest a 0.5% lower open in Europe later. The US dollar recoups some of yesterday’s losses. EUR/USD hovers just north of 1.16 with an upward sloping trendline acting as support.
News & Views
The National Bank of Poland yesterday reduced its policy rate by 25 bps to 3.75%. The Bank saw inflation further declining in January to 2.2% Y/Y from 2.4% in December. The NBP also took notice of a decline in core inflation over the previous year. The decision to cut the policy rate also was supported by new macro-economic projections. The NBP sees inflation over the period 2026-2028 (middle of the 50% probability forecasting range) respectively at 2.25% (from 2.95% in the previous forecast), 2.4% (from 2.6%) and 2.55% in 2028. Growth forecasts for the period were upwardly revised to respectively 3.9% (from 3.65%) and 2.9% (from 2.6%). The 2028 estimate is set at 2.95%. Governor Glapinski indicated in February that the NBP could cut the policy rate further if the new forecasts wouldn’t show any worrying signals. However, over the previous days markets had doubted the rate cut as global volatility jumped sharply and as the zloty declined due to the conflict in the Middle East. In this respect, the policy statement only briefly mentions that energy commodity prices have risen recently and that global activity and inflation is subject to uncertainty, in particular the geopolitical situation. Markets will look for additional guidance at the press conference of governor Glapinski this afternoon. The 2-y Polish swap rate yesterday eased 5.5 bps (to 3.735%). The zloty intraday after the decision hardly lost any ground an closed the day even stronger at EUR/PLN 4.27 from 4.2875.
At the presentation of the annual report of the National Bank of Belgium (NBB), governor Wunsch indicated that additional measures of € 3-4 bln that the government intends to take to bring the Belgian budget deficit back in line with the EU trajectory won’t be enough. The measures would bring the deficit below 5% of GDP. However, the NBB governor indicated that the government should bring the deficit to 4% which is sees as more sustainable, considering extra measures necessary for defense, rising costs of aging and higher interest rate costs. In this scenario an extra budget effort of €11 bln might be necessary.
