Markets
Stock markets drew some minor comfort from the Wall Street Journal story. European equities rose another 0.8%, pulling the likes of the EuroStoxx50 away from key support areas around 5500. Main US indices add around 1%. The US business newspaper citing administration officials said that US president Trump is considering to exit the Iran war even if the Straight of Hormuz remains largely blocked. It’s another U-turn in tone which, just yesterday, was all about bombing plants, stealing uranium and sending more troops to the region. Meanwhile headlines hit the screen of a US-Israeli attacking desalination plants on the Qeshm island located near the Strait. We’d take it with a grain of salt. Brent does so to with the price of a barrel of oil holding well above the triple digits. That’s not enough to completely derail economies but materially higher than one month ago and destined to inject strong upward price pressures. While at the matter, European CPI captured the first impact of the energy price shock with the March print matching our inhouse nowcast of 2.5% y/y on a headline basis, up from 1.9%. Monthly prices rose a strong 1.2%, strongly lifted by a 6.8% m/m energy price rally. Core inflation eased to 2.3% from 2.4% while services CPI decelerated to 3.2% from 3.4%. That does little to ECB market expectations though. There’s still a cumulative 70bps+ in rate hikes priced in for this year with a 50-50 chance for a first move next month. ECB’s Muller said he cannot rule out such a scenario while Radev sees external shocks feeding into price expectations, perhaps referring to worrying signals coming from yesterday’s EC’s Economic Sentiment Indicator. German bund yields by and large ignored the CPI outcome and whipsawed to currently trade slightly lower at the long end of the curve (+/- 2 bps). USTs outperform, sending rates between 2.4 and 5 bps lower. An improved risk environment and having interest rate differentials working against, the US dollar loses out against most global peers. The trade-weighted DXY’s test of key resistance around 100.5 failed and prompted return action lower. EUR/USD bounced back to north of 1.15. Even JPY gets some respite, allowing USD/JPY to drift lower to 159.3.
News & Views
Polish consumer prices rose by 1% M/M and 3% Y/Y in March (vs 2.1% Y/Y last month). The rise was mainly due to fuel prices rising 15.4% M/M and 8.5% Y/Y. Electricity, gas and other fuel prices declined 0.1% M/M with yearly inflation holding at 3.9%. Food price inflation was flat on a monthly basis and 2% Y/Y. The National Bank of Poland (NBP) targets inflation of 2.5% ( +/- 1%pt tolerance). The NBP cut its policy rate by 25 bps at the March 4 meeting based on a further easing of inflation in at the start of the year and favourable new (inflation) forecasts available at the time. In first comments from NBP MPC members since the conflict in the Middle East mostly were reluctant at guiding for interest rate hikes anytime soon. Markets currently err to hikes in the second half of the year. The zloty weakened from near EUR/PLN 4.22 to test the 4.30 area at the early stages of the war in the Middle East. At EUR/PLN 4.29, an orderly correcting zloty now trades at the weaker side of the EUR/PLN 4.25/4.30 range that guided trading over the previous three weeks.
Riksbank (RB) governor Eric Thedeen today commented on the recent developments. At the March 19 meeting, the RB held the forecast for the policy rate to stay at 1.75% this year. As the war in the Middle East continues, Thedeen sees the economic consequences to be ‘more extensive and protracted’. Monetary policy cannot prevent energy prices from rising but the RB wants to avoid them from spreading. “One insight from recent years is that it is risky for a central bank to assume that it is possible to see through supply shocks. If the risks of spillover effects and persistently higher inflation increase, we may need to tighten monetary policy”, Thedeen assesses. However, for now, the RB governor assumes RB can take a wait-and-see approach as inflation is relatively low to start with. February CPIF and CPIF ex energy inflation were respectively 1.7% Y/Y and 1.4% Y/Y. Markets see only a limited (< 20%) chance on an RB rate hike in May. A 25 bps (+) step is only discounted by August. After a protracted rise against euro from November to early February (EUR/SEK 10.50 best since august 2022), the krone retreated. In February markets still saw a chance for the RB to cut the policy rate even further. In March, this was reversed, but the RB is still seen lagging the likes of the ECB when it comes to addressing inflationary risks. EUR/SEK currently trades near 11.95.
