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German Bunds outperformed US Treasuries yesterday on milder than expected Spanish CPI and soft comments from Italian ECB board member Cipollone. He suggested that the ECB might be able to reduce rates swiftly as the to give the economy a chance to recover as inflation eases. German yields declined between 5.8 bps (5 & 10-y) and 4.3 bps (2-y). US yields ceded between 2.3 bps (2-y) and 4.7 bps (30-y). A $43bn 7-y US Treasury action went smoothly. A further easing of financial conditions supported equities (Dow +1.22%). The dollar mostly succeded marginal gains (DXY close 104.34; EUR/USD 1.0828). USD/JPY 152 remains a potential line in the sand for BoJ interventions. The yen gained modestly to close at USD/JPY 151.33, but the picture remains fragile.

After US close, Fed Waller brought gave an update on his end of February “What’s The Rush” comments in a speech before the before the Economic Club of New York titled: “There’s Still No Rush”. Economic output and the labor market show continued strength, while progress in reducing inflation has slowed. Economic growth is slowing from elevated levels, but evidence of a significant slowdown is sparse. There are indications that the labour market is moving toward a better balance, but it is still adding jobs at a rapid pace. With respect to inflation, Waller analyses that 3 and 6 month annualized core measures were running at a 4.2% and 3.9% pace in February. These shorter-term inflation measures suggest that progress has slowed or even may have stalled. Waller wants ‘to see at least a couple months of better inflation data before I have enough confidence that beginning to cut rates will keep the economy on a path to 2 percent inflation.’. This hope for evidence de facto won’t be evident as base effects suggest a further upward drift in inflation in the next five months. A first Fed rate cut in June seems highly premature. US yields this morning add between 4 bps (2-y) and 0.5 bps (10-y).

Later today, the eco calendar contains US weekly jobless claims, the MNI Chicago PMI and pending home sales. German retail sales again disappointed (-1.9% M/M) this morning. Belgium and Portugal publish February inflation data. French, German, Italian and US PCE deflators are tomorrow on tap. Wallers’ comments might help to put a floor below (US and EMU) yields and benefit the dollar with EUR/USD closing in on the 1.08 big figure/support area.

News & Views

Rating agency S&P affirmed the US’ AA+ rating with a stable outlook. The decision is supported by the wealth, resilience, and diversity of its economy, its institutional strengths, extensive economic policy flexibility including proactive monetary policy and the unique status of the dollar as the world’s leading reserve currency. But comparatively weak fiscal indicators that continue to constrain the sovereign credit rating offset those strengths. The agency notes that (bipartisan) efforts to meaningfully lower deficits and tackle budgetary rigidities remain elusive. Deficits are projected to average 6% of GDP in the coming years, pushing the debt to GDP ratio from 94% in 2023 beyond 100% in 2026-2027. Due to a changed interest environment, S&P expects net general government interest to revenues to stick around the 2023 levels of 11%. GDP growth is seen at 2.5% this year before averaging to 1.7% in 2025-2027. Inflation should ease from 2.8% this year towards the 2% over the next couple of years.

Polish MPC member Maslowska in an interview with PAP newswire said it’s possible to think about rate cuts in the second half of 2025 or early 2026. She refers to the many uncertainties that could drive up inflation and the current projection of not hitting the target until 2026. Maslowska didn’t even want to rule out a hike this year should one or more of the upside risks materialize. On the zloty, which continues to trade around the multiyear highs of EUR/PLN at 4.3, she said there’s still room for appreciation that could be tolerated. Her colleague Iwona Duda sounded slightly less hawkish. While she saw no room for rate cuts this year, the discussion itself could start at the end of 2024..

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