Markets
Today’s EMU CPI/US PCE deflators were supposed to provide a reality check as markets recently adapted positions in line with the Fed and the ECB guidance that central banks will (have to) take their time to assess where inflation is really headed for. As expected, Y/Y measures enjoyed favourable base effects. The month-on-month figures in this respect, provides a better insight into the actual price dynamics. French HICP jumped 0.9% M/M, still lowering to Y/Y measure to 3.1% from 3.4%. German HICP printed exactly as expected (0.6% M/M and 2.7% Y/Y from 3.1%). Spain also surprised to the upside (0.4% M/M and 2.9% Y/Y). In this context, (European) bond investors understood that there is no reason yet for the ECB to prepare markets for aggressive easing any time soon. The strong monthly dynamics kept EMU yields well supported, with the short end underperforming. German yields added up to 5.0 bps (2-y) going into the publication of the US PCE deflators/annex spending and income data. US deflators came out exactly as expected (headline 0.3% M/M and 2.4% Y/Y, Core 0.4% M/M and 2.8% Y/Y). Still, the monthly rise in the core PCE was the fastest since January last year. Services inflation excluding housing and energy even jumped 0.6% M/M, the fastest since March 2022. A bit surprising, despite high core inflation, US yields reversed an initial rise, currently even ceding between 1 and 3 bps. Markets apparently don’t see today’s data as a strong enough reason to push the start of the Fed rate cut cycle further beyond the June meeting. German yields also softened after the US data . German 2-y intraday just missed the 3.0% barrier, but currently again trades near 2.92%. The 10-y intraday tested the 2.50% level, but post the US data returned to the 2.43% area. After today’s rather stubborn monthly inflation data, we now look out for the activity data, starting with the US ISM to be published tomorrow (manufacturing) and next Tuesday (services). The benign reaction on interest rate markets still left equity markets in ‘low-volatility’ territory (EuroStoxx 50 +0.15%, S&P 500 + 0.4%). The soft post-PCE market reaction also blocked any tentative USD gains (DXY 103.84 vs 103.95 open; EUR/USD 1.0845 vs 1.0838 open). The yen outperforms after BOJ board member Takata this morning said that the price target is coming into sight, potentially opening the door for policy normalization in the near future. USD/JPY in two waves dropped from an opening level in Asia near 150.7 to currently change hands near 149.7.
News & Views
Hungarian central bank governor Matolcsy warned that government plans to amend the central bank law would constitute a significant attack against the MNB’s independence and autonomy. He also condemned the government’s fiscal spending plans to boost consumption. The planned legislation seeks to broaden the purview of the central bank’s supervisory board, including government appointees. EUR/HUF tested resistance around 394.70 (finale hurdle before 400) in the immediate aftermath of the comments, but a break didn’t materialize. MNB vice-governor Virag provided some counterweight by stressing that the MNB will maintain an appropriate positive real rate. The forint came under selling pressure after the MNB accelerated rate cuts earlier this week with a 100 bps move.
Sweden and Switzerland posted quarterly GDP data. Swedish growth unexpectedly declined by 0.1% M/M, putting the country in a small technical recession following a similar decline in Q3. Details showed household consumption recovering following a streak of five consecutive contractions (+0.7% Q/Q), but investments fell by 1.8% Q/Q and net exports contracted 0.5 percentage point. The overall growth rate for 2023 was a negative 0.2%. The Swedish Riksbank indicated earlier that it won’t shy away from cutting policy rates ahead of the ECB. EUR/SEK holds its ground near 11.20. Swiss GDP beat consensus, growing by 0.3% Q/Q and 0.6% Y/Y. There were positive contributions from private consumption (+0.3% Q/Q) and government consumption (+0.6% Q/Q) with net exports and investments being a drag on growth. The Swiss franc was as stoic as the SEK after the release, trading at EUR/CHF 0.9530.
