KBC Sunset Market Commentary 17/03/2023 via Trader Talent

• Yesterday, it took some time for (money) markets to assimilate ECB Chair Lagarde’s message that there is still ground to cover for the ECB as inflation is staying too high for too long. Markets reluctantly moved to discount one additional 25 bps hike in the spring. Quite a similar reaction function occurred on expectations for the Fed’s tightening cycle going forward. Even as market tensions eased, money markets weren’t prepared to put much hard money on the table for a scenario of US Federal Reserve raising its policy rate beyond 5% or the ECB to bringing the deposit rate to 3.5+% levels. In a context where central banks switch from some kind of forward guidance regime to a highly data-dependent approach, annex lingering concerns on financial stability, investors prefer not to frontrun on what might be decided throughout Q2. With few eco data to guide trading and no background comments from ECB or Fed governors, markets today continue to err to the side of caution. After starting little changed to even marginally higher in Asia/early in Europe, European/German and US yields were again captured in a protracted intra-day decline. German yields are ceding 18/20 bps across the curve. 10-y intra-EMU spreads versus Germany widen modestly  (Italy, Portugal, Greece +2 bps, France +3 bps). The ECB announced that banks will early repay an additional € 87.7 bln of longer term TLTRO funding. The announcement didn’t change the market dynamics in a profound way. US yields show a similar picture declining  between 21 bps (5-y) and 10 bps (30-y). Consumer confidence from the University of Michigan unexpectedly declined from 67 to 63.4. Maybe even more important for markets, inflation expectations 1 -year ahead eased further to 3.8% from 4.1%, reinforcing the bond rally. Equities can’t hold on to yesterday’s rebound. It suggests some persistent underling uncertainty going into the weekend. The Euro Stoxx 50 is ceding about 1.6%. US opened in red currently declining between 1.30% (Dow) and 0.75% (Nasdaq).
 
• FX markets again show no unequivocal trading pattern. The USD DXY index drifted lower this morning, but at 104.15 trades off the intra-day lows. EUR/USD is holding yesterday’s post-ECB gain (EUR/USD 1.0635). The yen outperforms both the dollar (USD/JPY 132.00) and the euro (EUR/JPY 140.3). The Swiss franc maybe lost some of its safe haven appeal trading at EUR/CHF 0.986 (compared to a CHF peak of in the low EUR/CHF 0.97 area earlier this week). Among the Central European currencies, the Czech krona rebounds further after recent correction (EUR/CZK 23.89). The forint (EUR/HUF 396.3) and the zloty (EUR/PLN 4.695) for now show less resilience/upside momentum.
 
News & Views

•  The People’s Bank of China cut the reserve requirement ratio for almost all banks by 0.25 ppt, effective from March 27. The average reserve rate of financial institutions (major > smaller > rural commercial) is now 7.6%. The 5% bottom rate for the latter didn’t change. The central bank said that its action was aimed at maintaining reasonable and sufficient liquidity and ensuring that money supply and nominal economic growth increase in parallel fashion. Further reserve requirement ratio cuts don’t seem necessary in the current economic recovery, but are nevertheless likely later this year when liquidity traditionally tends to tighten. The Chinese yuan weakened marginally after the RRR-cut announcement with USD/CNY rising from 6.87 to 6.89.
 
• The OECD published its interim economic update, titled “a fragile recovery”. The institute raised its global growth forecast (compared to November 2022) for this year and next respectively from 2.2% to 2.6% and from 2.7% to 2.9%. Declining energy prices have contributed to the modest improvement in the global outlook. The earlier-than-expected re-opening in China is also expected to have a positive impact on global activity, reducing supply chain pressures and giving a boost to international tourism. Headline inflation has begun to decline mainly due to the easing of energy and food prices, but services inflation is persistent. Therefore, the OECD recommends monetary policy to stay the course while fiscal support should become more targeted. The acting chief economist of the OECD, Pereira, said that inflation is still the big problem despite the turbulence of the last days.