Markets
Vocal ECB members provided core bonds with some early momentum on Friday. Especially ECB Villeroy gave some support by suggesting that an April rate cut is still in play less than 24 hours after ECB Lagarde actually ruled that scenario out at the ECB’s presser. Fed Chair Powell earlier last week did more or less the same by bringing May back in to play when suggesting that the Fed is not far from being confident enough that inflation is sustainably heading to 2%. Core bonds spiked to intraday highs after February payrolls gave more evidence of a soft landing scenario, enabling the Fed to gradually start lowering rates. Net job growth beat consensus in February (275k vs 200k) but downward revisions to December and January figures (-167k) dwarfed the headline beat. The unemployment rate ticked up to 3.9%, the highest level since January 2022, with wage growth slowing to 0.1% M/M and 4.3% Y/Y. Moves higher didn’t last in the close, suggesting that the March correction higher could be up for a pause. Today’s light eco calendar effectively suggests some kind of truce going into tomorrow’s February US CPI inflation numbers, which together with Thursday’s retail sales are the final key input for the March 20 FOMC meeting.
The US dollar spiked lower on the payrolls, but similarly managed a return to opening levels (DXY 102.75; EUR/USD 1.0940). JPY outperformed after Reuters strengthened expectations that the BoJ at its March policy meeting will lift its policy rate out of negative territory. This morning, there are more BoJ whispers that the central bank is also considering scrapping its yield curve control policy altogether and replacing it by announcing it advance an indication on the amount of bonds it plans to purchase. Japan’s largest union federation on Friday announces results of its annual wage negotiations (shunto) in what is expected to make or break the BoJ’s normalization plans. USD/JPY this morning holds below 147, just above the YTD low (145.90). Sterling was better bid last Friday, perhaps by default as the currency didn’t have to worry about any dovish central bank comments. EUR/GBP closed at 0.8508, near the key 0.85 support zone. The area can be tested this week with the UK labour market report (tomorrow) and production data (Wednesday) on the agenda.
News & Views
The Portuguese center-right coalition Democratic Alliance (DA) narrowly won snap elections. The DA coalition likely secured 79 seats in Parliament. The Socialist Party of outgoing Prime Minister Costa is projected at 77 seats. The far-right Chega Party came out as third and quadrupled its seats to 48. DA leader Luis Montenegro earlier ruled out a coalition between AD and Chega, suggesting that Portugal might be heading for a minority government. Socialist party leader Pedro Nuno Santos, already indicated that his party won’t support DA in parliament.
Chinese CPI inflation rebounded to 0.7% Y/Y in February compared to a 0.8% Y/Y decline in prices in January. On a monthly basis, prices rose 1%. The rebound was more pronounced than the 0.3% Y/Y expected. However, it is far from sure that the up-tick in inflation will mean the end of the deflationary trend in the country. The move for an important part was driven by a deceleration in food price deflation, while seasonal demand related to the Lunar New Year also offers part of the explanation (e.g. a sharp rise in travel prices). However PPI producer prices still remain well in negative territory, easing from -2.5% Y/Y to -2.7% Y/Y.
Rating agency Fitch raised the Turkish long-term foreign currency rating to B+ from B with a positive outlook. The upgrade reflects increased confidence in the durability and the effectiveness of policies implemented since the pivot in June 2023, including greater-than-expected frontloading of monetary policy tightening and reducing macroeconomic and external vulnerabilities. Inflation expectations have eased and external liquidity risks moderated. The positive outlook reflects the expectations that the country’s policy should be consistent with a significant decline in inflation as well as a continued reduction in external vulnerabilities.
