Markets
US Treasuries tested sell-off lows on Friday after January producer price inflation delivered the third upset of the week when it comes to price developments. CPI inflation and import/export prices earlier on the week showed signs of sticky (services) inflation as well. The trio triggered a new big repricing in Fed policy rate expectations. The preferred market scenario for a first 25 bps rate cut switched from May to June after having been pushed from March to May earlier on the month following a stellar payrolls report. By the time of the May Fed policy meeting, the US central bank will only have two additional CPI reports (3 PCE deflators) at its disposal which is almost impossible to bring the longed-for confirmation that inflation is sustainably on a path towards the 2% inflation goal. More and more Fed members stick to their December views on the total amount of 2024 rate cuts as well. Fed Chair Powell was the first to do so prominently in the 60 Minutes interview with SF Fed Daly on Friday also confirming that three policy rate cuts for this year seems reasonable. Atlanta Fed Bostic is in the two rate cut camp with a first one expected only by July. US money markets continue shifting in the Fed’s direction with currently “only” 4 policy rate cuts discounted over the course of the year compared to six just a month ago. Daily changes on the US yield curve eventually ranged between +2.7 bps (30-yr) and +6.8 bps (2-yr). German yields followed the upward trajectory, ending 1.3 bps (30-yr) to 6.1 bps (2-yr) higher. European stock markets closed the final session of last week with small gains resulting from a good start (catch-up with WS on Thursday evening) whereas the unpleasant PPI release saddled US benchmarks with losses of up to 0.82% for Nasdaq. The dollar initially rallied from EUR/USD 1.0770 to 1.0730, but the move didn’t last despite the more fragile risk climate. EUR/USD is currently approaching resistance coming from the upper bound of the YTD downward trend channel around 1.0790.
Chinese markets reopen following Lunar NY celebrations, but they don’t leave much traces on trading. Stock markets are slightly higher while CNY fixes almost bang in line with one week ago (USD/CNY 7.20 area). News flow is thin and that will stay so for the remainder of the day. Volumes are further reduced by the US public holiday (President’s Day), suggesting some sentiment-driven trading within existing technical ranges. Later this week, attention shifts to an ECB tracker of negotiated wages (tomorrow), Minutes of previous Fed (Wednesday) and ECB (Thursday) meetings and global February PMI’s (Thursday).
News & Views
Rating agency Fitch affirmed Belgium’s AA- rating with a negative outlook. The negative outlook reflects the risk that fiscal consolidation might be insufficient to achieve debt stabilization over the medium term. The country’s budget deficit should narrow gradually to 3.5% of GDP from 4.3% in 2023 as Fitch expects structural fiscal adjustments of 0.5% of GDP per year. However, this is counterbalanced by rising age-related budgetary costs and rising interest rate expenditures. Belgium is likely to be placed under the EU’s Excessive deficit procedure this year. Fitch sees the Belgian debt to GDP ratio at 107.5% in 2027 from 105.3% end 2023. The rating agency also mentions political uncertainty related to the outcome of the June 9 2024 elections. The risk of a prolonged political standstill could push back the budget preparation and progress on consolidation. Belgium’s 2024 growth is expected at 0.8% in 2024 down from 1.5% in 2023, with especially a negative contribution from net exports weighing on growth.
French Finance Minister Le Maire downwardly revised the country’s growth forecast to 1% from 1.4%. Geopolitical tensions (Ukraine, Middle East) and poor economic growth in China and Germany are mentioned as reasons for the downgrade. The government also announced plans to cut spending by €10bn. The actions should keep the country on track to reduce the budget deficit to 4.4% of GDP this year (from 4.9%). Le Maire vowed that the measures would not result in increasing taxes. The government is keeping open the option of implementing a supplementary budget in summer, depending on the economic circumstances and the political situation.
