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The US Bureau of Labor Statistics published its annual CPI revisions today. The same event last year showed some deviations from the initial outcomes large enough that they casted doubt on the speed of the disinflationary process. This time around, however, the hyped-up release lived up to its reputation as a non-event. Both the headline and core measure saw some adjustments but they were minor and two-sided. Having last year’s unpleasant surprise in mind, financial markets breathed a sigh of relief. US Treasury yields dropped from their intraday day highs in a kneejerk reaction before reversing course and resume today’s ride higher. They currently add between 2.4-3.7 bps across the curve. German Bunds underperform in an inversion move. Yields rise 6 bps at the front with the 2-y feeling ready for a test of the YtD high. Central bank speech was limited to ECB’s Kazaks nothing that inflation has fallen strongly, making 2024 the year of rate cuts. While the precise timing depends on the data, Kazaks said he isn’t as optimistic as markets on an inaugural cut in spring (euro area money markets price in about 35 bps of cuts by June). Speaking of data, market attention is gradually shifting towards Tuesday’s US CPI reading (January). Analysts expect the headline figure to ease from 3.4% to 2.9% and see a more gradual decline in core CPI from 3.9% to 3.7%. With all but every Fed member basically ruling out a March cut, all eyes are turned to the May policy meeting. A rate cut then (not our preferred scenario) is for about 80% discounted and could in theory gain further traction in case of a number in line or below consensus. Other important US data include January retail sales on Thursday and University of Michigan consumer confidence on Friday. The UK, however, is taking center stage with an extended economic update, spanning the labour market, retail sales and especially January CPI & Q4 GDP numbers. This may well be the trigger needed to unlock EUR/GBP from its current impasse. The pair is unable to escape from the laws of gravity, keeping it in an extremely tight trading range since mid-January. EUR/GBP looks especially vulnerable for a break to the downside with the key technical reference at 0.8492 the only thing standing in the way for a return to 0.834 (August 2022 correction low).

News & Views

Inflation in Hungary for the first time since March 2021 returned within the 3.0% +/- 1.0% target band of the MNB. Prices rose 0.7% M/M but this still reduced the Y/Y measure from 5.9% to 3.8% (consensus 4.3%), lower than the mean value in the December inflation report. According to the MNB, the positive surprise was primarily due to lower than expected fuel and processed food prices. In a separate assessment the National Bank of Hungary reckoned that measures of core inflation also declined. Core inflation ex indirect taxes eased from 7.6% to 6.1%. CPI ex processed food slow from 9.6% to 8.1%. Core inflation was also slightly below the MNB expectations while the rises in prices of demand-sensitive items was in line with the projection. On a more general level, the MNB sees a general slowdown in inflation, fuelled by the combined effect of tight monetary policy, the government’s measures to strengthen competition, subdued demand, base effects and a significantly lower external cost environment. The MNB sees the continued slowdown in underlying inflation illustrated by the fact that three-month annualised core inflation and inflation were both below 3 percent. The 2-y Hungarian swap yield dropped 11 bps after. The data again raise the case for the MNB to step up the pace of rate cuts from 75 bps to 100 bps. However, this argument is in balance with the forint weakening close to the EUR/HUF 390 barrier Admittedly, the forint didn’t decline any further today (EUR/HUF 388.5).

According to data published by the Swedish Riksbank today, the Bank reached the targeted amounts aimed at reducing the currency risk on its foreign exchange reserves. In September last year, it started the process of hedging the countervalue of USD 8 bln and euro EUR 2 bln of reserves. The procedure was expected to take between 4 and 6 months. The amounts of hedged funds were reached in the week of January 26, completing the program. The procedure officially wasn’t intended to serve as a currency intervention to support the krone. At the same time, it was seen as a tool to limit losses in reserves if the krone, which was seen as trading at a weak level, would appreciate. EUR/SEK currently trades at 11.28, compared to levels close to EUR/SEK 12 at the end of September.

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