Markets
This morning, the PBOC surprised markets with a much bigger than expected 25 bps cut of the 5-year prime loan rate (3.95%) aiming to support the real estate market and hopefully also helping to provide some oxygen (and confidence) for broader economic activity. However, the market reaction in China and abroad was lukewarm. For now, markets clearly maintain their doubts on a sustained recovery of the Chinese economy. European equities mostly didn’t go anywhere (Eurostoxx currently -0.2%). US indices open in red, suggesting some tentative risk-off sentiment (S&P 500 -0.6%). In the absence of other high profile data, European markets today kept a closer eye on the ECB quarterly indicator of negotiated wages. The Q4 2023 figured eased from 4.7% to 4.5%. This should give the ECB some comfort. In its December staff projections the ECB still upwardly revised its 2024 forecast for compensation per employee to 4.6% from 4.3%. ECB policy makers recently pinpointed too high wage growth as a major risk for a smooth continuation of the disinflationary process. However, as many of the key collative wage negotiations are taking place in the first quarter, it probably will take until the May report for the ECB to get some real clarity in this topic. For 2023 as a whole, the ECB saw 4.5% of negotiated wage growth compared to 2022. The impact of the release on European interest rate markets remains modest. German yields are easing between 3.5 bps (5-y) and 2.0 bps (30-y). US yields change between -5.5 bps (2-y) and +1.0 bps (30-y).
On FX markets, the dollar still can’t find its composure, even as last week’s inflation data postponed markets’ expectations for a first Fed rate cut to June. DXY slips below the 104 big figure. EUR/USD ‘easily’ cleared the early February ST top at 1.0806 (currently 1.082) breaking out of a ST downtrend chancel. The yen underperforms the global USD decline, but the USD/JPY also struggles to hold the 150 barrier. EUR/GBP initially extended its return higher in the 0.85 big figure, but ceded most of the initial gains in afternoon trading. Still, the EUR/GBP 0.8493 support looks ever more solid. In a hearing before the UK Treasury committee, BoE governor Bailey sounded rather dovish as he said that market expectations on a BOE pivot to rate cuts are ‘not unreasonable’. He also signaled that inflation doesn’t have to fall to the 2.0% target before the BOE can start cutting rates. UK gilts outperform Bunds today, easing between 6 bps (5-y) and 4 bps (30y).
News & Views
The Belgian debt agency announced that it will open two retail issues on Thursday with the subscription period running from February 22 to March 01. The retail notes are one with a 1y maturity (3% Mar2025) and one with a 3y maturity (2.5% Mar2027). It will only be tomorrow clear whether the 1y note will enjoy a preferential withholding tax regime (15% instead of 30%) like the stellar retail note launched in August of last year (€21.9bn raised). If granted the exemption, the 1y Note will yield 2.55% instead of 2.10% after withholding tax. This compares with a net yield of 2.81% for the August retail note. The 3y issue will have a 1.75% yield after taxes. The combined issue size is this time capped, at €6bn.
Canadian inflation was flat in January whereas markets feared a new acceleration to 0.4% M/M. Y/Y-inflation slowed more than hoped, from 3.4% to 2.9%. The largest contributor to headline deceleration was lower Y/Y-prices for gasoline in January (-4%) compared with December (+1.4%). Prices growth for food purchased from stores and lower prices for airfares and travel fares also contributed to the deceleration. Mortgage interest costs (27.4% Y/Y) and rent (7.9% Y/Y) remained the biggest positive contributors. Since Q1 2022, headline inflation was only lower in June of last year (2.8% Y/Y). Underlying price gauges improved more than expected as well with the trimmed mean core CPI – the Bank of Canada’s preferred measure – slowing from 3.7% Y/Y to 3.4%, matching the lowest level since August 2021. Excluding shelter costs, CPI rose 1.5% from a year ago. At its January policy meeting, the BoC switched a tightening bias to a neutral approach, with the key question being how long the policy rate must be kept at the current level (5%). Money markets discount a first rate cut in June, in line with the Fed. The Canadian dollar loses out again USD after today’s CPI print (USD/CAD>1.35). CAD swap rates drop up to 13 bps at the front end of the curve.
