Markets
The ECB and its Watchers XXIV conference and UK February CPI data provided a welcome interlude counting down to tonight’s Fed decision. ECB Lagarde basically held to the recent communication line. Moving into the dial back phase requires wage growth to slow further, a continued decline in inflation towards 2% and a confirmation in new internal projections. This suggests that the June meeting is the preferred time to start the easing cycle. ”Our decisions will have to remain data dependent and meeting-by-meeting, responding to new information as it comes in”. In this framework, the ECB isn’t able to pre-commit to a particular rate path, even after the first rate cut. Executive Board member Schnabel elaborated on a potential higher neutral rate due to structural factors including the climate transition, the digital transformation and changes in the geopolitical context. The comments had no lasting impact on European interest rate markets. In German yields trade between flat (2-y) and -2.5 bps (30-y).
UK February inflation data were close to expectations. Headline inflation eased to 0.6% M/M and 3.4% Y/Y from 4% (vs 3.5% expected). Core inflation also declined slightly more than expected to 4.5% from 5.1%. However, services inflation remains stubbornly hight at 6.1%. UK gilts are marginally outperforming US Treasuries and Bunds, declining between 1.5 bps (2-y) and 3 bps (5 & 10-y). Question remains whether these data are sufficient for the BoE to become more specific in its timing of rate cuts when they announce their policy decision tomorrow. Recall the MPC was highly divided in February. 6 members voted to leave the policy rate unchanged. Two members still considered it necessary to raise the policy rate (25 bps) as inflation remains too long above the target. On the other hand, one member already vote to cut rates. Money markets still see a first BoE rate cut at the August meeting. Looking at sterling, today’s inflation data didn’t inspire markets to prepare for a dovish twist. EUR/GBP briefly ‘jumped’ to the 0.8855 area immediately after the release, but EUR/GBP currently even trades marginally lower at 0.854.
US interest rate markets are almost paralyzed in the run-up to the Fed decision, with yield changes less than one bp across the curve. The dollar succeeds some follow through gains (DXY 104.1, EUR/USD 1.085). USD/JPY (151.75) is only a whisker away from the 2023 top. Equites, both in Europe and the US are little changed. With respect to the Fed meeting, markets look out whether/to what extent stubbornly high inflation will force Powell and co to upwardly revise their inflation forecasts and whether 3 rate cuts (25 bps) this year is still the mainstream scenario. We see no reason for the Fed to inspire markets to front-run on its easing cycle. On the contrary.
News & Views
Belgian consumer confidence held steady at -5 in March after wiping out an uptick towards the end of last year over the past two months. In the National Bank of Belgium’s survey, households displayed more pessimism in March about the outlook for the labour market over the next twelve months. Fears of a rise in unemployment popped up again even if there was little change in the expectations for the general economic situation. On a personal level, while their expectations for their own future financial situation remained virtually unchanged, households have raised their savings intentions, which had dipped last month. It’s this latter component that compensated for a worsening labour market outlook, resulting in the unchanged -5 headline figure.
Leo Varadkar unexpectedly announced his resignation as both Irish Prime Minister and leader of the governing Fine Gael party. Varadkar said there was no “real reason” behind his departure but it does come after the government suffered twin defeats in Irish referenda, for which the outgoing premier took responsibility. His party is also sliding in the polls to the benefit of Sinn Fein over Ireland’s acute housing crisis and concerns over immigration. Varadkar’s resignation doesn’t necessarily trigger general elections, which are scheduled for March 2025. He asked for a new leader of the party to be chosen on April 6 with the new prime minister then to be elected after parliament’s Easter break.
