Markets
Strike three. Some dismissed the hotter-than-expected inflation prints in January and February as statistical flukes that would soon be reversed. March delivered another nasty upside surprise. Headline CPI rose from 3.2% to 3.5% vs 3.4% expected while the underlying gauge defied hopes for the tiniest of declines by stabilizing at 3.8%. Low base effects have helped but that’s only part of the story. Current price dynamics remain (very) strong with 0.4% m/m readings for both indicators topping the 0.3% estimate. For core CPI specifically, the Q1 m/m readings result in an annualized 4.5%, the most since May last year. Housing has been a major boost to (services) inflation for quite some time because of the slow roll-over of rents in the CPI calculations. But even when filtering for this component (as well as energy), the so-called supercore services gauge came in at a sharp 0.65% m/m, pushing the y/y to 4.77% – the fastest pace since April last year. Today’s numbers are a similarly nasty surprise for Powell too. The Fed chair put aside the January and February editions with surprising ease at the March policy meeting, labelling them as the bumps one can expect to occur in the road toward 2% inflation. Let’s see how many agreed with that in tonight’s FOMC meeting minutes release. Anyway, we flagged the idea of a first Fed rate cut in September at the very earliest for some time now. Markets are aligning. June was already off the table, July is given a less than 50% chance and even September currently is no longer fully priced in. There’s <50 bps (or two cuts) priced in for all of 2024. That’s less than the three cuts the March dot plot projected. Back then, this was backed by the smallest majority possible. That balance now probably shifted to the hawkish side. The front end of the yield curve underperforms hugely. The 2-y yield surges 18.4 bps and has set its sights on the symbolical 5%. Longer maturities add between 6.6 (30-y) and 11.9 bps (10-y). We’re wary to draw firm conclusions from intraday moves in the 10-y real yield, but a 10 bps daily increase sure is worth mentioning. Tonight’s $39 bn 10-y auction just got even more interesting. Any sign of weakness won’t go unnoticed and will prompt a test of the 4.54% resistance level (62% recovery on the 2023Q4 decline). The US dollar spares no one, not least JPY. USD/JPY surpasses the 152 mark with ease to a new 34-year high. At this point, verbal interventions by Japanese officials have officially turned useless. EUR/USD loses a big figure to 1.0767 currently with technically little in the way for a return to the current 1.0695 YtD low. It’s up to ECB’s Lagarde tomorrow to prevent the euro from succumbing to pressure.
News & Views
Czech inflation rose by 0.1% M/M in March with the Y/Y-figure stabilizing at 2%. Food prices continue to drive the relatively strong disinflation this year, down 5.9% Y/Y. We expect headline inflation to remain relatively stable in the coming months, falling back to close to 1.5% Y/Y in the summer (base effects). Towards the end of the year, it should again be slightly above the CNB’s 2% target. Annual inflation was 0.9 percentage point lower in March than the CNB’s winter forecast. There was a greater-than-expected slowdown in administered price inflation (6.6% Y/Y vs 9.5% expected by the CNB). Core inflation was also somewhat lower than forecasted (3.3% Y/Y vs 2.7%), reflecting low growth in prices of foreign inputs and a cooling of domestic demand due to a restrictive CNB monetary policy stance. Fuel prices unexpectedly increased year on year in March (3.8% vs -1.6%). We don’t expect today’s inflation print to alter the CNB’s current 50 bps rate cut pace at the next couple of meetings. Only by September, they could return to slower steps (25 bps), resulting in an end of year policy rate of 3.5%. Czech swap yields add 2.5 to 3.5 bps across the curve today with CZK reversing yesterday’s losses at EUR/CZK 25.36.
Norwegian headline and core inflation both rose by 0.2% M/M in March, compared with consensus estimates of 0.5% and 0.4% respectively. Especially food and non-alcoholic beverages (1.9% M/M) and recreation and culture (-0.4% M/M) contributed to this lower outcome. As a result, annual inflation fell more than hoped, from 4.5% Y/Y to 3.9% Y/Y at the top level and from 4.9% to 4.5% for the core gauge (lowest level in 20 months). Today’s data back the case of a first rate cut by the Norges bank in autumn (September 16). The market implied probability of this scenario rose from 50% to 65% after the CPI release. The Norwegian krone trades volatile near 11.60.
