• Markets today initially continued building on yesterday’s positive momentum as stress in the banking sector/financial stability subsided further. Trading was mainly sentiment/order driven with again hardly any data with market moving potential scheduled for release. First national EMU CPI data (Germany, Spain, Belgium) will only be published on Thursday. The first estimate for core and headline EMU will be released on Friday. Friday afternoon the US PCE deflators also might help to decide whether markets will give more weight to CB’s anti-inflationary narrative. US yields initially rebounded up to about 7 bps, but sentiment dwindled as US investors joined. US yields currently rise between 4.0 bps (5-y) and 0.5 bps (30-y). The US 2-y yield tries to regain the 4.0% barrier. Contrary to yesterday, German bonds underperform the US Treasuries with yields rising 4-5 bps across the curve (was 8.00/10.0 bps earlier today). ECB’s Muller repeated recent ECB mantra that underlying inflation remains an area of concern. Intra-EMU spreads versus Germain remained era of relative calm even during recent period of heightened market stress. Changes in 10-y spreads against Germany were again modest today (Italy + 3 bps, Greece +4 bps). In a broader perspective, the Italian 10-y spread versus Germany still holds the rather tight range roughly between 170 and 200 bps which is already in place since the start of the year (cf graph infra). For now financial stability concerns didn’t really affect sentiment on intra-EMU bond markets. Later today we still keep an eye at the US consumer confidence release and a $ 43 bln sale of US 5-y US Treasuries. (European) equites again opened about 0.8% higher, but gains gradually evaporated. The 4200 area apparently is a hard nut to crack. US indices even open with a moderate loss. If even financial stability concerns subside, the combination of yields staying higher than recently assumed while at the same time growth concerns continue to linger, might temper enthusiasm to really push a new protracted upleg in risk assets.
• Even as the rally in risk assets subsided intraday, it again didn’t really help the dollar. DXY dropped further to trade in the 102.5 area. After a one day, risk-on correction yesterday, the yen again shows resilience today (USD/JPY 130.8 from a close at 131.6 yesterday). EUR/USD in a protracted intraday uptrend currently trades near 1.084 (from 1.08 early this morning). However, the 1.093 correction top for now stays out of reach. Sterling started strong this morning (EUR/GBP 0.8775 area) after record yearly rise in the BRC shop price index (8.9%). However, initial gains could not be sustained. In a hearing before Parliament, BoE’s Bailey indicated that recent developments might cause some tightening of financial conditions which the BoE takes into account when deciding on monetary policy.
News & Views
• European Union energy ministers have backed a plan to extend gas demand reductions by a year in a bid to ensure enough supplies for next winter. The current voluntary 15% gas demand cut is about to phase out by the end of the month. With the extension, it now applies until March 2024. The target could become binding if there are severe supply shortages. The rules were introduced last year after Russia’s invasion sparked concerns for shortages during the winter. In the period between August and January, the European bloc succeeded a 20% gas demand cut.
• The Hungarian central bank kept its base rate steady at 13%. It also keeps a range of emergency measures in place, including the O/N tender (de facto policy) rate at 18%, as it improves the monetary policy transmission. To that end, it further raised the reserve requirement ratio to 10%. A system of tiered interest rates will be applied to the reserve account, which encourages an increase in the share of liquidity tied up on a long-term basis, further enhancing monetary policy transmission. The MNB has been saying for some months now that it takes persistent changes in risk perceptions into account when setting the parameters of its (emergency) instruments. It sheds some light on the rationale of today’s decision as investor sentiment deteriorated recently. Today’s meeting was also accompanied by new forecasts. GDP is seen increasing by 0-1.5% this year with growth picking up in the second half of the year. The expansion in 2024 is seen at 3.5-4.5% and 3-4% in the year thereafter. Inflation should ease slowly first before the pace accelerates in coming months. CPI is projected to be 15–19.5% in 2023, 3–5% in 2024 and 2.5–3.5% in 2025. The forint outperforms peers today. EUR/HUF eases from 386.3 to 381.57 currently. Hungarian swap yields extend an intraday advance, adding between, 10.3-29.5 currently with the front end underperforming.