Markets
Wednesday’s Fed dots & Powell’s press conference brought a diffuse message, hampering an unequivocal market reaction. Higher/above neutral growth, a material uplift in especially this year’s inflation forecast and the unemployment rate holding below NAIRU contrasted with the interest rate dots confirming the scenario of 75 bps rate cuts this year. Powell at the same time stayed confident that inflation is on a gradual (admittedly bumpy) path to the 2% target. Interest rate markets and equities apparently are inclined to trade the second part. In a session deprived of data, US yields are falling between 4-5 bps across the curve, further extending the post-Fed decline going into the weekend. In the same vein, (US) equities are holding near all-time top levels. Powell apparently (unintentionally?) ‘convinced’ investors that financial conditions can stay…’easy for longer’. German yields follow the downdrift easing between 4.5 bps (2-y) and 7 bps (10 & 30-y). German Ifo business confidence printed better than expected (87.8 from 85.7), with both current assessment and expectations contributing to the improvement. Still, this doesn’t change markets’ view that the ECB will scale back tightening in June if (inflation and wage) data allow to do so. Even ECB’s Nagel again subscribed this scenario. UK gilts stay well bid too with yields easing 5-7 bps even as UK data this morning printed constructive. Retail sales avoided a setback (0.0% M/M) after a jump higher in January (3.6%). UK GFK consumer confidence also gave some comfort for spending going forward (-21 unchanged, but better prospects for personal finance). However, interest rate markets are driven by yesterday’s BoE policy pivot. The debate on a final rate cut is formally closed. BoE governor Bailey in an interview with the FT this morning even ‘approved’ market pricing with respect to (multiple) rate cuts later this year. Money markets are ever more embracing the option of a first BoE rate cut in June (> 80%) rather than August.
On FX markets, the dollar shows a mixed picture. EUR/USD traders apparently give some more weight to the higher-for-longer bias of the Fed dots. Combined with the ECB potentially frontrunning/outpacing Fed easing, makes EUR/USD vulnerable. The pair dropped to the 1.081 area intraday (currently 1.082). A break below 1.0796 would open the door for a return to the 1.0695 YTD low. In USD/JPY, technical considerations are at work. Today’s decline in US yields prevented a real attack/break of the multi-year top (151.95), trigger a modest setback (currently 151.25). However, Japanese officials probably stay on red alert as a break contains the risk of more unwarranted/disorderly yen losses. EUR/GBP briefly touched the 0.86 big future after leaving its 0.8850 peg post the BoE. However, momentum dwindled going into the weekend. Still, at EUR/GBP 0.858 the key 0.8500/0.8493 key support looks much better protected compared to a week ago.
News & Views
Hungary’s Economy Ministry yesterday announced it’ll remove a yield cap on bank deposits of some investors from April 1, saying it was no longer needed now that the central bank has halved the policy rate to 9%. The cap was one of a series of measures that sparked central bank outrage, saying they interfered with monetary policy. Just last week, the government also said it would phase out an interest-rate cap on loans of SMEs. With these rate caps the government sought to shield smaller and mid-sized companies from an aggressive central bank tightening campaign against soaring inflation. With the announcements following the decision to delay controversial plans to strengthen central bank supervision some weeks ago, there appears to be a thaw between the cabinet and the central bank. Markets, including the forint, are wary though. The Hungarian currency didn’t profit from the news yesterday and losses enlarge today. EUR/HUF moves beyond 396, turning the forint into the regional underperformer.
Businesses in Belgium gained more confidence in March. The headline indicator rose for a second month to -10.4, the highest since May of last year. The uptick was not across all sectors though. Confidence grew manufacturing with business leaders expressing much more positive demand and employment expectations. They also upgraded their order book assessments but were less positive about inventory levels. Business climate in the building industry improved as well, mainly on demand expectations. Sharply falling expectations for demand and for placing orders with suppliers triggered a retreat in the trade subseries. In business-related services, finally, a recovery in demand expectations was insufficient to compensate for a slump of expected activity levels.
