Markets:
EMU Flash March CPI ‘eased’ slightly more than expected from 2.6% Y/Y to 2.4% Y/Y. Core inflation (ex-energy) dropped from 3.1% to 2.9%, the first sub 3% reading since February 2022. Food price inflation slowed further from 3.9% to 2.7%. Energy inflation was still negative (-1.8% Y/Y), but the favorable comparison base is petering out. Industrial goods inflation also slowed further from 1.6% to 1.1%, but services inflation held stable at 4% for the fifth consecutive month. The 0.8% M/M pace at least suggests that (more than) confirmation is needed for (core) inflation to sustainably move to the 2%. A still favourable base effect in April might further reduce headline inflation and provide the ECB the ‘comfort’ that is needed to start with an inaugural 25 bps cut in June. However, as is currently the case in the US, the process might become more bumpy in late spring/early summer. In this respect, the 100 bps of cumulative rate cuts discounted till the end of this year, might still prove to be overly optimistic, especially if the Fed would be forced into less that than three rate cuts envisaged in the March dots. German yields hardly reacted. A tentative correction on yesterday’s sharp rise didn’t go far. German yields currently even add an additional 2 (30-y) to 4 bps (2-y). In the US, ADP private job growth served as a starter before the Services ISM and Fed chair Powell’s speech later today. With a 184k monthly job growth, the labour market still shows no signs of any material deterioration which Powell at the March press conference suggested could serve as a reason for the Fed to consider a pre-emptive rate cut. US yields also gain another 5-7 bps across the curve post ADP. The 2-y yield (4.73%) still trades marginally below the YTD top (4.75%). Longer maturities are forcing the technical break higher (10-y 4.42%, vs 4.35% previous top). US equities (S&P 500 -0.1%) still manage to limit the damage after yesterday’s correction. Brent oil is closing in on the $90/b barrier, adding to inflationary risks.
On FX markets, the dollar (for now) fails to profit for solid US data and higher yields. DXY even loses marginally (104.79). EUR/USD also gains a few ticks (1.078). USD/JPY is the exception to the rule with the pair (151.9) only a whisker away from the 152 area that is rumored to be the line in the sand for the Japanese authorities.
At the time of finishing this report, the US services ISM printed softer than expected with the headline index easing from 52.6 to 51.4. Also price pressures eased substantially from 58.6 to 53.4. Employment improved slightly but remains in contraction territory. (US) yields return a few bps, but the correction remains modest as markets are counting down Fed’s Powell’s speech at the Stanford Business, Government and Society Forum later today.
News & Views:
Hungarian debt agency AKK yesterday published a modification of its funding plan in line with a higher net financing need (HUF 3982bn) from the government. AKK’s total gross issuance need is raised by HUF 1376bn to HUF 11648bn. 39% of this modified plan was completed in Q1. The main changes are a higher HUF institutional issuance intention (+HUF 609bn to HUF 2372bn), more T-bill issuance (EoY stock + HUF 649bn to HUF 1573bn), less HUF retail issuance (-HUF 223bn to HUF 4064bn) and slightly more planned FX financing (+HUF 222bn to HUF 2619bn). The upward revision of the latter is mainly because of stronger demand at January USD and EUR auctions, allowing the debt agency to print €1bn more than planned in December. It suggest that smaller Samurai (JPY) or Panda (CNY) bonds can be expected in H2 2024 with AKK ruling out tapping the USD and EUR markets for the rest of the year. FX project loans (eg EIB) and other types of FX financing (eg private placements) are still a possibility.
The US Energy Department cancelled plans to buy oil for the Strategic Petroleum Reserve amid rising prices. They “keep the taxpayer’s interest at the forefront” and forfeit on purchasing as many as 3 million barrels of oil. The Energy Department is gradually refilling reserves after releasing some 180mn barrels in the wake of the Russian invasion. The currently hold around 363mn barrels compared from almost 600mn at the start of 2022. They will continue to monitor market dynamics with the aim of lifting SPR
