Markets
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| • On Friday, it was impossible for markets to decouple its reaction to the US payrolls from the developing story on Silicon Valley Bank. The US economy in February added an above-consensus 311 000 jobs. The unemployment rate rose from 3.4% to 3.6%, but at the same time participation rate improved from 62.4% to 62.5%. Average hourly earnings (AHE) were marginally softer at 0.2% M/M and 4.6% Y/Y). Even so, in times of market stability, these data probably wouldn’t have changed markets’ expectations between a 25 or 50 bps Fed rate hike on March 22. However, with financial stability issues from the SVB looming large, US yields nosedived for a second consecutive session. In a steepening move US yields again declined between 14.3 bps (30-y) and 28.4 bps (2-y). In the 10y sector, the decline was almost solely at the expense of lower real yields. US equities again lost between 1.07% (Dow) and 1.76% (Nasdaq). The Eurostoxx50 ceded 1.32%. The dollar remained in the defensive as markets still pondered how much room the Fed has left over to combat inflation. The US currency lost on a daily basis (EUR/USD close 1.0643, DXY 104.58), but finished well off the intraday lows. Moves in European bond/interest rate markets were less sharp. Still, the German yield curve also steepened with yields declining between 18 bps (2-y) and 12.1 bps.
• During the weekend, the Fed and the Treasury took measures to ringfence the fall-out from the SVB collapse (and from other potential cases facing similar problems). In a statement, the Fed, the Treasury and the FDIC announced that it took measures to fully protected deposit holders from SVB and Signature Bank. The Fed also announced a new ‘Bank Term Funding Program’ that offers loans to banks under easier terms (collateral) and also relaxed (collateral) terms for lending through its discount window. Asian markets this morning show a mixed picture
with some still facing follow-though losses from WS on Friday (Topix -1.51%). At the same time, China outperforms.
The US yield curve this morning continues its steepening move with the 2-y yield losing another 15 bps. Key question remains to what extent uncertainty on financial stability will change the trajectory of the Fed’s anti-inflation campaign. Markets now have downscaled expectations to a 25 bps hike later this month and 5.1% peak rate, compared to expectations for a Fed peak rate at 5.50/5.75% mid last week. Today, there are no important data on the calendar. The reaction of the Fed to the new financial stability issues is difficult to assess. Even so, the UK example in September last year, showed that this doesn’t automatically excludes further rate rises. At current levels, we have the impression that (more) than enough Fed tightening is priced out, especially if tomorrow’s US February CPI data would confirm persistence of (core) inflation. A rebound in US equity futures at least suggests markets see the weekend action from the Fed and the Treasury might go some way to address similar problems, if they were to occur. We don’t expect the developments in the US to change the ECB’s intention to raise the deposit rate by 50 bps on Thursday. The sharp loss of interest rate support at the short end of the curve keeps the dollar in the defensive. EUR/USD regained the 1.0695 intermediate resistance, with a next key reference seen at 1.0803 (14 Feb top). If the decline in ST US yields/scaling back of Fed tightening stops, the USD decline might gradually slow.
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News Headlines
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| • Germany has averted a postal strike after the country’s biggest postal group agreed to double-digit pay rises to compensate for decades-high inflation. The two-year deal covering 160 000 employees was agreed in last-minute negotiations and is the latest sign of how once supply-driven inflation has morphed into a domestic and demand-driven one. Wage negotiations in the euro zone has resulted to pay rises of 4.4% in 2022 and 4.8% this year, an ECB series showed. Chief economist Lane said this was higher than the level consistent with inflation returning to 2%.
• Tyrowicz, the National Bank of Poland’s most hawkish policy member, called governor Glapinski’s call for rate cuts by the end of the year “irresponsible”. She referred to inflation being forecasted to only be at the (top of the) tolerance range in the third quarter of 2025. This long time frame and continued price stability risks should mute any talks about potential monetary easing, Tyrowicz said, adding that even if rates would be lifted to 7% is would probably not be enough to bring inflation back in a timely enough manner. She has consistently been outvoted in her call for higher rates. The Polish zloty in recent weeks appreciated to 4.67 but remains within the relatively narrow 4.65/4.80 trading range...
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Graphs
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The ECB flagged another 50 bps rate hike in March. This clear prioritization to combat inflation initially failed to push the 10-y Bund to the cycle top north of 2.50%. A batch of strong data served as a global wake-up call. The 10-y yield was hurled to new cycle highs as markets further adjusted ECB rate expectations to 4.0%. After touching a cycle top near 2.75%, the SVB risk-off aborted the uptrend with the 2.43% correction low serving as first support.
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December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. Markets refused to follow this guidance up until the wake-up call coming from strong Jan & Feb eco data. The US 10-yr yield temporary surpassed of 4%, but the safe haven bids due to the SVP collapse trigger a sharp reset back in the previous 3.30%/3.90% trading range.
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USD lost momentum in Q4. EUR/USD left a downtrend channel improving the technical picture. The euro received support from the ECB’s hawkish twist, lower energy prices and a risk-on sentiment. The pair tested 1.10, but a break failed with the dollar regaining momentum post strong US January/February data. A EUR/USD decline below 1.0735/1.0656 support was aborted post-SVB.
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The BoE raised its policy rate by 50 bps in February, but suggested that rates will peak after a final move in March. The UK central bank that way caused a yield disadvantage for sterling, which already has weak structural cards (weaker growth prospects, twin deficits, LT brexit consequences …). EUR/GBP for now avoided a return above 0.90 as UK eco data suggest that the BoE has more ground to cover as well.
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| Note: All times and dates are CET. More reports are available at KBCEconomics.be which you may sign up to.
This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.
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