• In a session devoid of important data in the US and Europe, aside from further headlines on the developments in the Russian-Ukraine conflict, investors could take a closer look at the consequences of the ECB finally returning to its core business: inflation management. Comments from ECB members Villeroy and Rehn reiterated that ‘gaining optionality’ was an important consideration for yesterday’s ECB decision to run down APP faster than expected and at the same time guiding that rates could be raised ‘some time after’ the end of APP. At least today, markets still tend to conclude that upside inflation risks will mostly like lead to the ‘option’ tilting to a rather soon & maybe also a more protracted normalization than envisaged until recently. The technical picture on swap market suggests that the EMU interest rate market is entering a new era. The 2-y swap (0.29%) broke above the key 0.25% resistance. Regaining 0.35% (Aug 2014 top) would confirm the view that the era of negative EMU interest rates is expected to definitively come to an end. The 10-y swap also again attacks the symbolic reference of 1.0%. Today’s uptrend in yields was complemented by a resumption of the risk-on rebound. Markets drew some additional comfort from headlines (around noon) that Russian president saw ‘positive developments’ in the talks with Ukraine. Even as the comments contained few specifics, European equity markets jumped higher with some indices gaining op to 3%. US markets opened with gains of 0.5%-1.0%. The easing of the safe have bid and post-ECB repositioning are (modestly) lifting German yields up to 3.5 bps for the 5-y (was more intraday). Intra-EMU spreads are reversing a (limited) part of yesterday’s widening (10-y Italian spread vs Germany -5 bps). US yields rise between 3.5 bps (2-y) and 1.5 bps (30-y). A relative calm is also returning to (parts of) the commodity market with brent oil ‘stabilizing’ near $109 p/b.
• FX markets also reached some kind of ST equilibrium with EUR/USD hovering near the 1.10 pivot (1.099). DXY hovers around 98.50. USD/JPY cross rate is a notable is exception. The yen recently didn’t profit much from Ukraine-related uncertainty. Today, the combination of a better sentiment and higher core yields still is a good enough reason to trigger further yen losses with USD/JPY testing the 117 barrier for the first time since early 2017. EUR/GBP is holding near the 0.84 big figure. Sterling doesn’t profit from decent January production data supporting the case for further BoE tightening next week. Among the smaller currencies, the Swedish crown this week succeeded a comeback after being captured in a protracted downtrend (uptrend EUR/SEK) since mid-January. Risk-on the main part of this story. Or will the ECB U-turn gradually also influence Riksbank thinking? EUR/SEK currently trades near 10.64, compared to a peak near 10.90 early this week.
• The Canadian labour market had a bumper month in February. Job growth more than recovered from the Omicron dip in January, printing at 336.6 k vs 127.5k expected. The unemployment rate fell a full percentage point to 5.5%. Unemployment was lower just one time in the series history (May 2019, 5.4%). The steep drop came even as the participation rate rose to a higher-than-anticipated 65.4%. The data solidify market expectations of (more than) 6 additional rate hikes by the Bank of Canada this year. The BoC kicked off the normalization cycle earlier this month with a first rate hike to 0.5% and didn’t rule out a half-point move in the future. It will most likely be complemented by a passive balance sheet roll-off from April on. The Canadian dollar gains vs the euro and dollar are limited. USD/CAD declines from 1.277 to 1.272, EUR/CAD is testing the 1.40 big figure.
• Argentina’s parliament approved a bill that backs the government’s $45bn debt restructuring agreement with the IMF, avoiding a March 22 default ($2.8bn payment). The original support package only dates back to 2018 ($57bn bailout). Debt repayments will now be delayed to 2026 in exchange for a government pledge to reduce the budget deficit over three years and curb central bank money printing. Especially subsidies on electricity and gas will be drastically reduced. The bill passed Argentina’s lower house with opposition support (202 of 257 votes) after the government dropped a clause stating that congress would support government economic policy.