Markets
Fed’s Powell’s semi-annual appearance before the Financial Services Committee of the House of Representative didn’t bring more specifics on the start of the Fed easing cycle s. The Fed Chair noticed considerable progress toward reaching the 2% goal and the Fed is likely to begin dialing back policy restraint at some point this year, but the MPC needs greater confidence that inflation is moving sustainably to the target. During the hearing, considerations on monetary policy were soon overshadowed by the debate on easing the proposals with respect to capital rules for banks. Earlier in the session, ADP job growth and JOLTS job openings were close to expectations. The US yield curve inverted further with the 2-y easing 0.4 bps while the 30-y declined 5.2 bps. Moves in German Bunds again were very limited with yields changing less than 1 bp across the curve. US equities found their composure after Tuesday’s setback (S&P +0.51%). The decline in the US-EMU interest rate differential finally pushed EUR/USD for a test of the 1.09+area (close 1.0899). USD weakness pushed USD/JPY below the 150 barrier. This morning, the move is extended on yen strength as higher than expected Japanese wage data and BoJ comments suggest a policy change is coming ever closer (USD/JPY 148.1). UK Fin Min Hunt announced in the Spring budget some modest tax cuts (including a 2% reduction in the National insurance tax). However, they were not seen as changing the picture for BoE policy in any profound way. Sterling lost marginally against the euro, holding within well-known territory (close 0.8561).
Asian equities trade mixed this morning with China and Japan (stronger yen) underperforming. The dollar remains in the defensive. Later today, markets look out for the ECB meeting, including the Staff’s economic forecast. Especially 2024 growth and headline inflation are expected to be downwardly revised. ECB Lagarde at the press conference will face questions whether this opens the door for ‘earlier’ rate cuts. However, we expect the ECB Chair to avoid any guidance on timing, as the bank looks for more clarity on the outcome of wage negotiations and their impact on core inflation. We don’t expect today’s meeting to be a game-changer for markets. The topside in EMU yields might be capped for now. A further rise in EUR/USD probably will come from USD softness rather than euro strength. EUR/USD 1.0917 (50% retr Dec/Feb decline) is under test. 62% retracement comes in at 1.0969.
News & Views
The Bank of Canada yesterday unsurprisingly kept the policy rate steady at 5%. Economic growth in Q4 was stronger than expected in the January Monetary Policy Report but stayed below potential. The BoC sees signs the labour market is easing, modest hiring and slower wage growth. The data point to an economy in modest supply. Still, inflation’s slow and uneven progress towards the 2% target remains a reason for caution. CPI eased to 2.9% in January but underlying pressures remain a concern. The BoC’s measures of core inflation remain above 3% Y/Y and on a three-month basis and the share of CPI components rising 3%% stays above the historical average. Internal discussions since January shifted from whether the policy rate is restrictive enough to how long it needs to stay at the current level. Before considering to lower the rate, the MPC first wants a further deceleration in core inflation in the coming months. USD/CAD slid yesterday but that was mainly a US dollar move rather than CAD strength. The pair tested but stayed just north of 1.35. Canadian swap yields changed between +1.9 bps (2-y) to -1.2 bps (30-y).
Poland’s central bank left policy rates unchanged as well at 5.75%. New staff forecasts, which assume stable NBP interest rates, show annual CPI at 3.5% (mid-point of the projected range) in 2024, 3.6% in 2025 and 2.9% in 2026. GDP over the same period is seen at 3.5%, 4.2% and 3.2%. Despite inflation is seen falling in coming months to levels consistent with the target, the NBP is particularly worried about the higher core inflation. In addition, the NBP cites substantial uncertainty around the CPI forecast, related to the shielding measures on energy and food prices. They assume a continuation in their current form, creating asymmetric inflation risks (skewed to the upside). Prime minister Tusk on Tuesday already said the cabinet is working on amended protection measures that will probably raise power prices after the current cap ends in June. Given that the NBP also sees medium term demand pressure in the economy coming from wage growth, it stuck to the status quo. The Polish zloty yesterday briefly touched the multi-year highs against the euro below EUR/PLN 4.30. That barrier remains under test this morning.
