Markets
Eurozone output growth slowed in March as input cost inflation hits the highest level for over three years. EMU March PMI’s give a sobering, though expected, indication on how the war in the Middle-East could impact the economy. The composite PMI decreased from 51.9 to 50.5, a 10-month low. The slowdown in growth was in large part due to a near stagnation of business activity in the service sector (50.1 from 51.9). The manufacturing PMI increased from 50.8 to 51.4. An overall decline of new orders centred on services. For a third month in a row, there was a marginal reduction in staffing levels. Companies continued to predict a rise in output over the coming year, but the degree of optimism was below the series average. The most market-relevant details came from price components. The sharp increase in input costs already spills to selling prices though at a less pronounced pace (still steepest pace since February 2024 though). The war also caused disruption to supply chains, with manufacturers reporting the most marked lengthening of suppliers’ delivery times in over three-and-a-half years. S&P Global, responsible for the release, commented that the survey’s price gauge is indicative of CPI inflation accelerating close to 3%, with cost pressure likely to add still further to selling price inflation in the coming months. Data underscore that the ECB is no longer in a good place. ECB policy makers in the meantime keep calling for (extra) vigilance on possible second-round effects coming from energy prices. PMI’s suggest that the pass-through occurs immediately. New vice-president Vujcic this morning said that policy makers will soon know whether they must act with “a lot of new data and news” available by April. He suggested to start with a small move (+25 bps) if hikes are needed and believes that we’re already departing from the baseline forecast towards the alternative scenario. Under the “adverse” one, EMU CPI is expected to average 3.5% this year assuming that the ECB keeps policy rates unchanged. For the record, US PMI’s painted a similar picture with the survey’s price gauges pointing to CPI accelerating back to 4%!
PMI’s, hawkish ECB-rhetoric and conflicting signals from the Middle-East (TACO vs Israeli attacks & Iranian denial & potential Saudi/UAE involvement & Russian export curb on fertilizers) already call an end to yesterday’s intraday market turnaround. The EMU swap rate curve bear flattens with yields rising by more than 10 bps at the front end of the curve. US yields rise by up to 5 bps. The only true market compass, the oil price, sticks above $100/b. The equity rebound is short-lived with key US and European indices losing 0.5% and more. The dollar profits with EUR/USD back below 1.16. Gold prices are down for a record tenth day on a row.
News & Views
The Middle East conflict sent chilling stagflationary vibes across the UK in March. The composite PMI fell to 51 from 53.7, dragged lower by the services sector (51.2 from 53.9). Lower business and consumer confidence led to the first decline in total new work in four months and delivery times lengthened amid ships re-routing and production stoppages at Middle East petrochemical suppliers. Input cost inflation, meanwhile, was the steepest since February 2023. Manufacturing even showed the largest acceleration (from February) in price pressures since the GBP depreciation following Black Wednesday in 1992. Squeezed margins and softer business activity growth contributed to another reduction in private sector employment. Job shedding picked up from last month. The one year ahead forward looking indicator eased to the lowest for nine months reflecting marked declines in optimism across both sectors. Geopolitical concerns were the top mentioned factor, alongside worries about the cost of living and weak domestic economic prospects. EUR/GBP shrugged at the release. The pair barely budget in the mid 0.86-0.87 area.
As a heavy net energy importer, Turkey is feeling the heat from Iran-related volatility. The country braces for inflation and balance-of-payment shocks at a time when domestic prices are already surging more than 30% (February data). That’s pressuring the country’s currency hard, particularly against the USD. Turkey officials are constantly intervening to keep lira depreciation limited to the monthly inflation rate, leading to heavy FX reserve drawdowns and the sale of foreign-currency bonds, including Treasuries. Bloomberg reported that officials are now considering to tap into their $135bn gold reserve. Gold prices fell marginally on the news with bullion now changing hands around $4360. USD/TRY currently trades around 44.35 with YtD gains (TRY losses) having mounted to 3.3%.
