• Two main stories were running the show on markets today. Both of them supported the ongoing core bond sell-off which recently concentrated on European markets. Germany initiated the first phase of a three-staged emergency plan to secure natural gas supplies (see below). Spooked markets send Dutch gas prices about 10% higher while Brent oil adds 3.4% in a spill-over move. Both boost inflation expectations for a tenth day (!) straight to a new 14-year high (2.84%). Today’s national inflation readings (March) are testament to how such soaring commodity prices actually affect realized price trends. Belgian CPI in March accelerated from 8.04% to 8.31% y/y (see below for details). Spanish HICP soared to a whopping, off the charts 9.8%. In Germany, prices rose 7.6% measured via the European approach, up from 5.5% and crushing the 6.8% estimate. Individual state readings reveal energy, transportation and housing costs (which include utility bills) as some of the biggest contributors. All this points to big upward risks to the EMU release due on Friday and, more than anything else, means the ECB cannot delay the long-overdue policy normalization any longer. ECB’s Kazimir (“wish that we exit the territory of negative rates within a year at the latest), Muller (“it’s right to ask whether such low interest rates are still appropriate) and Makhlouf (“we are concerned at the impact of inflation”) agree. President Lagarde stuck to the “optionality, gradualism, flexibility” mantra but we know she knows better. Money markets bring forward rate hike bets (> three 25 bps increases this year) as well as increase the expected peak policy rate (near 1.5% end next year) today. It brings about another European yield curve bear flattening. Changes in Germany range from +6 bps (30y) to 11 bps (2y). Swap yields add 6-7 bps at the front end and 5 bps in long tenors. The US curve steepens marginally with moves from flat to +3.5 bps, unbothered by a spot-on yet strong ADP job report (455k vs 450k consensus). These more limited moves hide an intraday recovery of 6-7 bps though.
• Markets have long frontloaded Fed tightening. This favoured the dollar over many of its peers. We are now witnessing the same with respect to the ECB and the euro. EUR/USD (1.1139) extends yesterday’s gains. It escapes from a bullish ascending triangle via the 1.1121 resistance (January interim low) level. Granted, dollar weakness is at play too. EUR/GBP is going for a second test of the 0.847 resistance. A break higher would hurl the pair back in the sideways trading range that long dominated in 2021. The Japanese yen is holding up pretty well despite rising core bond yields and commodity prices. The only in theory supporting factor is the fragile equity environment (stocks down 1% in Europe). USD/JPY inches below 122.
• German economy minister Habeck this morning initiated the first (“early warning”) of three phases of an emergency plan in case of a Russian gas cut-off. Current gas stocks cover approximately 20 days of forward consumption. Habeck called on firms and individuals to try and reduce energy consumption as much as possible. His office will also create a crisis team to deal with the stability of future gas supply. In the third and final phase, the state will intervene and regulate the gas flow. The warning comes because of the stand-off on Russia’s demand for “hostile states” to pay EUR and USD-denominated gas contracts in rubles. Gas prices rise by another 5%-10% today. The main European benchmark (TTF nat gas future) trades again at €120/megawatt-hour from an €110 opening.
• Belgian inflation rises from 8.04% Y/Y in February to 8.31% Y/Y in March, its highest level since March 1983. Inflation based on the national health index goes from 7.56% Y/Y to 7.68% Y/Y. The high inflation remains largely due to energy prices which have an annual inflation rate of 57.22% and contribute 4.82 percentage points. Core inflation rose from 3.28% Y/Y to 3.75% Y/Y. Inflation for food products (including alcoholic beverages) stands at 4.63% this month, compared to 3.84% last month. Inflation for services has risen to 3.78% from 3.20%. Inflation for rents has increased from 2.49% to 2.64%.