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Money supply and lending in the eurozone are slowing faster than expected, indicating an imminent economic contraction.

Data released on Monday morning pointed to a slowdown in new lending, coinciding with the start of the euro zone’s interest rate hike cycle. Loans rose by 3.6% year-on-year, compared with 3.8% in the previous month and an expected acceleration to 3.9%.

The annualised growth rate of M3 slowed to 3.5% yoy from 4.1% at the end of last year. The deceleration was stronger than the expected 3.9%. The money supply in Europe is not keeping pace with inflation, which was 8.6% in January and is expected to slow to 8.2% in February.

For the first time since 1981, the monetary aggregate M1 declined year-on-year. Such a development is often seen as an anti-inflationary indicator.

At the same time, the ECB continues to reduce its balance sheet by 962 billion or 11% since its peak in June. The most significant contributor to the decline in central bank assets has been the completion of regular liquidity programmes. The Fed’s balance sheet was 6.3% below its peak.

For the economy, falling credit and a slowdown in lending are essential signals of an economic downturn.

From a fundamental point of view, this is negative data for the euro as it could lead the ECB to start easing policy sooner. However, this data has little impact on the currency as most traders await the release of February inflation estimates later in the week.

Equity markets ended last week on a negative note but they're bouncing back once more in trade on Monday.

Interest rate fears are front and centre, following a terrible month of data from the US in January, as far as the Fed is concerned at least. That was further compounded on Friday by the PCE, income, and spending data which didn't come as a major surprise given what preceded it but it didn't offer any relief either.

Thankfully, January is likely to be an anomaly month driven by unseasonably warm weather and the data over the next few weeks prior to the next Fed meeting will confirm to what extent that is the case. For now, bond investors are fearing the worst, something that is much less evident in equities. ​

Another hot jobs report next week could put seriously test the enthusiasm we've seen so far this year in equity markets as it would cast major doubt over the extent to which January was a blip and cement expectations for more rate hikes for longer, perhaps even reverting back to 50 basis point moves.

In the interim, while this week offers an abundance of economic data and events, the vast majority is tier two or worse and so will not likely be hard-hitting. But as we've seen today, investors clearly don't need much of a catalyst to get things moving.

Choppy and directionless

Oil prices are drifting lower again as we continue to see choppy trading conditions. We've seen consolidation in oil prices for many weeks now but it is happening at a glacial pace and there's little reason to expect that's going to change in the immediate future. One upside risk could be an improvement in the economic data that points to cooling in all the right places, while any indication that China's adjustment is experiencing difficulties could be a downside risk. That aside, choppy with ultimately sideways trade could be on the cards a little longer.

Losing momentum

Gold is a little higher today, buoyed by a slightly softer dollar and small declines in US yields. We are seeing less momentum in the sell-off recently as it drifts ever closer to $1,800. That remains the big test for the yellow metal now, between $1,780-$1,800, and it may take another nasty turn in the economic data to seriously test that support.

On the rise again

Bitcoin is rallying another 3% today after briefly dipping below $23,000 over the weekend. Once more we're seeing some resilience in the space and it seems as long as equity market optimism remains in place, crypto bulls are going nowhere. The key test to above remains the $24,500-$25,500 region, a break above which could generate a lot more excitement.

The USDJPY eases from new nine-week high on Monday, as bulls faced strong headwinds at 136.44 (Fibo 38.2% retracement of 151.94/127.22) and ahead of converged 100/200DMA’s which are forming a bear-cross, prompting traders to collect some profits after last Friday’s 1.3% advance (the biggest daily gains since Feb 3).

Larger bulls started to lose traction, though dips are likely to be shallow as 14-period momentum on daily chart is rising while RSI turned south after touching the border of overbought zone.

Dollar keeps firm bullish stance on fresh hawkish rhetoric from Fed and higher than expected US inflation and consumer spending data, which contribute to scenario of extended policy tightening cycle and possible renewed increase of pace of rate hikes, in Fed’s key task – bringing high inflation under control.

Adding to bullish scenario is formation of reversal pattern on monthly chart, as well as bear-trap under psychological 130.00 support.

Rising 10DMA (134.66) and Friday’s low (134.05) offer initial supports ahead of 133.00 zone (Fibo 38.2% of 127.22/136.55, reinforced by rising 20DMA), which should contain deeper pullback to keep bulls intact.

Res: 134.66; 137.12; 138.17; 138.58.
Sup: 135.41; 134.66; 133.50; 132.80.

Markets

There is no stopping the repositioning on core (EMU and US) interest rate markets, even not in session with only second tier data. Economic confidence from the European Commission, contrary to most other data evidence of late, surprisingly deteriorated slightly (99.7 from 99.8 vs 101 expected). However, it was no reason to trigger a correction on the established yield rally. German yields today set new cycle peak levels for all maturities up to 10-y. At 2.58% the German 10-y yield touched the highest level since July 2011. The German 2-y yield (3.07%) even trades at levels not seen since October 2008. Markets now fully accept that the ECB won’t cut interest rates this year and even ponder scenario’s that see the hiking cycle lasting well into summer. German yields are rising 3-4 bps across the curve. The 30-y underperforms (+7.5 bp). Despite markets pricing a scenario of a prolonged Fed and ECB hiking cycle with a higher peak level, this recently didn’t translate into lower inflation expectations as measures by EMU and US inflation swaps. Inflation swaps across almost all maturities (both in the US and EMU) trade off the January lows. This ‘rebound’ also occurs despite a sharp decline in gas prices and oil holding at relatively low levels. One should be cautious too read too much in short-term swings in inflation swaps. Even so, it might suggest that also this market is having second thoughts that it won’t be that easy to bring down the kind of inflation caused by higher labour costs/a tight labour market which structurally adds to (services) inflation. US yields initially also tried a further upside test, but finally fell prey to a modest countermove easing between 4 bps (5-y) and 1.5 bps (30-y). US durable goods orders at least weren’t to blame. Headline orders declined 4.5% M/M after a 5.1% gain in January, but underlying non-defense ex aircraft printed strong both for orders (0.8% M/M) and shipments (0.7%). Equities today showed some resilience. For now, equity investors apparently aren’t overly worried that higher yields will immediately translate into an aggressive decline in global demand. The Eurostoxx 50 regains about 2.0% . US indices open 0.5%-1.0% in green.

FX markets aare mainly inspired by the daily swings in risk sentiment. The dollar rally takes a breather. DXY drops back below the 105 mark (104.85). After filling bids in the 1.0535 area, EUR/USD currently trades in the 1.0585 area. A constructive risk sentiment supports sterling. EUR/GBP returned to the 0.88 area as investors await the details of the new EU-UK brexit deal. CE currencies also took a strong start to the new week. EUR/CZK touched a new multi-year low near 23.60. The forint (EUR/HUF 379) is near the mid-month recovery top against the euro. Equally, the zloty extends its rebound (EUR/PLN 4.7125).

News Headlines

Commenting when the Bank of International Settlements published its quarterly review, head of economic research Borio said monetary authorities must “get the job done” when it comes to getting inflation back under control. Declaring victory too soon would invoke spirits of the ’70, when inflation rekindled after central banks lowered policy rates too soon and as a result had to hike them to painfully high levels afterwards. The BIS in this respect warned investors for overestimating the chances of rate cuts next year, saying that current pricing of policy rates declining materially in 2024 was in “sharp contrast” to what central banks were communicating. Interestingly, Borio also said there is nothing wrong with central banks slowing the tightening pace only to accelerate it again if needed.

Belgian inflation eased from 8.05% in January to 6.62% this month on a  0.70% M/M  price drop, Statbel reported. Energy was a big contributor to the deceleration. Base effects resulted in energy inflation of -7.93% y/y with gas prices and electricity respectively 30.8% and 16% lower compared to February 2022. This caused the “housing, water and energy” component to drag the headline number 0.47 ppts lower. Core inflation (ex. energy and unprocessed food) rose further from 8.05% to 8.28% on increases in processed food products and services (up from 6.56% to 6.96%). This breakdown is critical in the ECB’s assessment. We expect other national numbers (tomorrow and Wednesday) and the EMU-wide inflation print (Thursday) to show similar dynamics.

In a speech, Fed Governor Philip Jefferson said, "core goods inflation has started to come down. Several indicators suggest that housing services inflation is likely to come down in the coming months. There is more uncertainty surrounding inflation in core services excluding housing. Over time, we'll learn more about inflation dynamics in this sector."

"The inflation outlook for this nonhousing category of core services partly depends on whether growth in nominal labor costs comes back down, and recent data suggest that labor compensation has indeed started to decelerate somewhat over the past year," he also noted.

Jefferson also rejected the idea of changing Fed's longer-run inflation objective of 2%. He said that would "introduce an additional risk by calling into question the FOMC's commitment to stabilizing inflation at any level because it might lead people to suspect that the target could be changed opportunistically in the future".

Full speech here.

The British pound has posted sharp gains on Monday, after falling below the symbolic 1.20 level on Friday. In the European session, GBP/USD is trading at 1.2026, up 0.72%.

In the UK, the economic calendar is unusually quiet this week, with no tier-1 releases. There will be a host of BoE members speaking, including BoE member Broadbent today and Governor Bailey and Chief Economist Pill later in the week. The BoE is widely expected to raise rates by 0.25% at the March 23 meeting, which would bring the cash rate to 4.25%. The UK economy appeared to be well on its way toward a recession, and the BoE signalled at the February meeting that it was considering easing up on the pace of rate hikes due to the slowing economy.

The central bank may have to reconsider its policy after strong economic data was released last week. Services PMI climbed back into expansion territory in January, rising from 48.7 to 53.3. As well, GfK consumer confidence for February improved to -38, up from -43 a year prior. Although consumer confidence remains deep in negative territory, this was the strongest release since April 2022. The improvement in economic activity has caused the markets to fully price in 0.25% hikes in March and May, with a 33% likelihood of the cash rate rising to 5% in August.

The UK left the EU in January 2020, but the vexing problem of the Northern Ireland border has continued to create friction between London and Brussels. There are hopes that the sides will announce as early as today that progress has been made, with speculation that a deal is very close to being reached. An agreement would be a massive victory for UK Prime Minister Sunak, who has been dealing with a lackluster economy and public worker strikes.

GBP/USD Technical

• GBP/USD is testing resistance at 1.2006. The next resistance line is 1.2082
• 1.1958 and 1.1864 are providing support

Daily Pivots: (S1) 134.87; (P) 135.69; (R1) 137.33; More...

Intraday bias in USD/JPY remains on the upside with focus on 38.2% retracement of 151.93 to 127.20 at 136.64. Rejection by this fibonacci level, followed by break of 134.04 support, will argue that such rebound from 127.20 has completed, and turn bias back to the downside. However, sustained trading above 136.64 will indicate that fall from 151.93 has completed, and bring further rally to 61.8% retracement at 142.48.

In the bigger picture, focus is now on 38.2% retracement of 151.93 to 127.20 at 136.64. Sustained break there will indicate that price actions from 151.93 medium term are merely a corrective pattern. Such development will maintain long term bullishness. Rejection by 136.64 will, on the downside, extend the fall from 151.93 to 61.8% retracement of 102.58 to 151.93 at 121.43 at a later stage.

Daily Pivots: (S1) 0.9354; (P) 0.9383; (R1) 0.9441; More...

A temporary top is formed at 0.9428 with current retreat. Intraday bias in USD/CHF is turned neutral first. Break of 0.9428 will resume the rebound form 0.9058. But strong resistance could be seen at 38.2% retracement of 1.0146 to 0.9058 at 0.9474 to limit upside. Break of 0.9289 resistance turned support will indicate completion of the rebound and turn bias back to the downside. however, decisive break of 0.9474 will carry larger bullish implications and target 61.8% retracement at 0.9730.

In the bigger picture, decline from 1.0146 is seen as part of a long term sideway pattern. As long as 38.2% retracement of 1.0146 to 0.9058 at 0.9474 holds, another fall is in favor through 0.9058. However, sustained trading above 0.9474 will indicate that the medium term trend has reversed, and open up further rally to 61.8% retracement at 0.9730 and above.

Daily Pivots: (S1) 1.0516; (P) 1.0566; (R1) 1.0595; More...

A temporary low is formed at 1.0532 with 4 hour MACD crossed above signal line. Intraday bias in EUR/USD is turned neutral first. While fall from 1.1032 might extend, strong support could be seen around 38.2% retracement of 0.9534 to 1.1032 at 1.0463 to bring rebound, at least on first attempt. Break of 1.0668 support turned resistance will turn bias back to the upside for 1.0803 resistance and above. However, sustained break of 1.0463 will carry larger bearish implications.

In the bigger picture, as long as 1.0482 support holds, rise from 0.9534 (2022 low) should continue to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273. However, sustained break of 1.0482 will bring deeper fall to 61.8% retracement of 0.9534 to 1.1032 at 1.0106, even as a corrective pull back.

Daily Pivots: (S1) 1.1899; (P) 1.1971; (R1) 1.2012; More...

GBP/SUD recovered ahead of 1.1914 and intraday bias is turned neutral first. Another fall is in favor with 1.2146 resistance intact. Break of 1.1914 will resume the decline from 1.2446 for 1.1840 support and possibly below. On the upside, break of 1.2146 resistance will turn bias back to the upside for further rebound to 1.2269 and above.

In the bigger picture,as long as 1.1840 support holds, rise from 1.0351 medium term bottom (2022 low) should still continue to 61.8% retracement of 1.4248 (2021 high) to 1.0351 at 1.2759. However, decisive break of 1.1840 will complete a double top pattern (1.2445, 1.2446) after rejection by 55 week EMA (now at 1.2251). Deeper decline should be seen back to 38.2% retracement of 1.0351 to 1.2445 at 1.1645.