• Markets yesterday staged a broad risk-on repositioning since the start of the Russian invasion in Ukraine, hoping that mutual economic retaliations at least would come to a pause. There was even hope that a high level meeting between the foreign ministers of Ukraine and Russian could yield some progress. That didn’t materialize as Russia still urges that its demands will need to be fulfilled first. After yesterday’s impressive rise, European equities, the euro and yields corrected mostly lower even before the headlines of the failure of the talks hit the screens.
The ECB as expected left policy rates unchanged. However, even the ECB can’t ignore runaway inflation anymore. The recalibration of the APP program in order to guarantee a smooth transition after the end of PEPP was changed before it at even started. APP buying will be raised to €40 bln in April, but will immediately being scaled back to €30 bln in May and €20 bln in June. The statement then reads that ‘If the incoming data support the expectation that the medium-term inflation outlook will not weaken even after the end of our net asset purchases, the Governing Council will conclude net purchases under the APP in the third quarter.’ According to the December roadmap, the ECB only expected APP to be reduced to € 20 bln in Q4. The bank also amended the sentence that ‘it expects the key ECB interest rates to remain at their present or lower levels’ by scrapping “or lower”. The ECB now guides that ‘Any adjustments to the key ECB interest rates will take place some time after the end of the Governing Council’s net purchases under the APP’. Growth and inflation evidently are subject to a high degree of uncertainty. Even so, the new ECB roadmap opens the door for a first rate hike at the September or October meeting. According to the ECB forecasts growth is downwardly revised to 3.7% in 2022 (from 4.2% in December) for 2022, to 2.8% (from 2.9%) and left unchanged at 1.6% for 2024. On the other hand inflation is once again upwardly revised to 5.1% this year (from 3.2%), to 2.1% in 2023 (from 1.8%) and to 1.9% in 2024 (from 1.8%). So, the ECB forecast puts inflation above or near the 2.0% target over the whole policy horizon, opening the way to more protracted policy normalization. EMU interest rate markets are reacting accordingly. Markets now again expect positive money market rates at the end of the year. The German curve bear flattens with yields rising 11/12 bps for the 2/5-y sector, down to 1.7 bps for the 30-y. The 10-y EMU swap almost touched the 1.0% barrier for the first time since October 2018. The 2-y surpassed 0.25% first time since 2014. Faster phasing out of APP bond buying widened the intra-EMU bond spreads with the 10-y Italian spreads rising 15 bps. European equities are ceding up to 3.0% after yesterday’s astonishing rally, but most of this correction occurred before the ECB policy announcement.
• Moves on the FX market are again less pronounced (and less sustained) compared to what happens on interest rate markets. The euro briefly touched EUR/USD 1.11+ levels, but currently even trades in the red (1.1020). The dollar reversed post-ECB softness with DXY at 98.20, near intraday highs. Post ECB euro strength against sterling also evaporates, with EUR/GBP (0.8385)n returning near opening levels.
• US inflation in February perfectly matched analyst consensus, quickening from 0.6% m/m to 0.8% to be up 7.9% y/y (from 7.5% in January). And it probably hasn’t peaked yet. Core inflation also rose from 6% to 6.4%. Owing to the sharpest price increase in four decades is exceptionally strong energy inflation (3.5% m/m) in particular. However, price pressures are broad-based with key-component shelter (with a 32% basket weight) costs growing an above-average 0.5% m/m. The food price is also on the rise (1%) as is transportation (1.9%). With inflation rising as expected, US money markets have little reason to ramp up bets for an aggressive hiking cycle (ie 50 bps) that will take off in March. US yields are higher since the CPI release but that was the result of knock-on effects by the ECB publishing its policy statement. US yields are rising between 3 bps (5-y) and 1.5 bp (30-y).