• Fed board member and vice-governor to-be Brainard’s speech yesterday still reverberated through financial markets today. She buried her outspoken dovish signature and now carries the hawkish banner high up in the sky. Her comments on the balance sheet (“to shrink at a rapid pace as soon as May”) in particular caught the attention since they come ahead of tonight’s Fed meeting minutes. The blueprint of QT is due in May but governors undoubtedly discussed the matter back in March. Investors will scour the publication for any clues. In the meantime, the bond sell-off simply continues. US yields add 4.1 bps to 9.6 bps in a bear steepener. The US 10y yield surpasses 2.56% resistance with ease and eyes the next reference between 2.75-2.8%. European swap rates hit new cycle highs from the 2y to the 30, rising 2.6 bps at the front end to as much as 7 bps (10y), despite ECB Lane’s balanced (“important not to over- or under-react to inflation”) or Panetta’s dovish comments. The latter said he sees no evidence of second-round effects and that inflation expectations remain anchored. European inflation expectations meanwhile rose to an intraday high of 2.97%. If they close at the current level of 2.91%, a new series high (since 2004) would be set. Peripheral spreads vs. Germany’s 10y yield widen. Italy (+4 bps) and Greece (+5 bps) underperform.
• Brainard put the finger on the sore spot in equity markets. A historically aggressive (global) tightening cycle – today’s NBP decision serves as illustration (see below) – brings about a stock sell-off. Main European indices lose almost 3%, WS opens with losses up to 2%. Risk-off induced by higher core bond yields do not help the traditional safe havens on currency markets. The Swiss franc is under pressure after a recent strong performance. EUR/CHF bounces from 1.013 towards 1.02. The Japanese yen also loses out against the euro and the dollar. The euro in general catches a breather, strengthening against most G10 peers. EUR/USD for example reversed course after dropping below 1.09 in Asian dealings to trade at 1.093 currently. It does little to the poor technical picture though. And the minutes still have to be released.
• Swedish Riksbank deputy governor Flodén delivered a hawkish speech titled “monetary policy will bring inflation back to target”. To understand the appropriate timing and strength of the central bank’s monetary policy response, they need to consider how robust inflation expectations and wage formation currently are and how economic activity will be affected by recent developments. Flodén emphasizes that the April 28 policy meeting is a live one. It is evident that the Riksbank needs to reassess and substantially adjust its plan for monetary policy. This implies raising the policy rate much earlier than planned. The forward guidance in February suggested a first rate hike in the second half of 2024. Flodén argues that it’s better act rapidly in a gradual way than having to be more forceful if they wait for too long. Swedish money markets are rapidly shifting towards discounting back-to-back 25 bps rate hikes in April and June. Swap yields add 5.2 bps (2-yr) to 10.2 bps (20-yr). The Swedish krona holds the balance with an overall better bid euro today. EUR/SEK remains nevertheless near the lowest levels since mid-January at 10.30.
• The National Bank of Poland hiked its policy rate by 100 bps, from 3.5% to 4.5%. It’s the largest rate hike in the current cycle and bigger than markets expected (split between 50 and 75 bps). The Polish economic outlook remains rather solid thanks to favourable domestic conditions and given the modest share of exports to Russia and Ukraine. Inflation (10.9% Y/Y in March) will remain markedly elevated before decreasing in the coming years supported by an appreciating zloty which, in the Council’s assessment, will be consistent with economic fundamentals. The NBP will continue taking all necessary actions in order to ensure macroeconomic and financial stability, including above all to reduce the risk of inflation remaining elevated. The zloty spiked higher immediately after the release (EUR/PLN dipped to 4.56) before returning back to the 4.64 area in anticipation of governor Glapinski’s press conference. The Polish swap curve bear steepens with yields adding 19 bps (2-yr) to 10 bps (20-yr).