• Early this morning, it looked that the congruent sell-off in bond and equity markets would simply continue going into the US March inflation release. At 2.83%, the US 10-y yield touched the highest level since December 2018. Asian equities mostly closed in the red, China being the exception to rule. European equities at the open also tumbled almost 2.0% (EuroStoxx50). European yields set new cycle peak levels. However, momentum wasn’t as strong as it was over the previous days. The yield rally already ran into resistance during the European morning session. US bond investors also shifted to a wait-and-see attitude going into the CPI release. Equities left the intraday lows. German ZEW investor confidence dropped further with the expectations measure (-41.0 from -39.3) nearing the lows set early in the pandemic. Even so, both the decline in the current conditions and expectations measure was less than feared. US headline CPI printed as expected at 1.2% m/m and 8.5% Y/Y (was 0.8% and 7.9% in February). Core inflation (excluding food and energy) printed slightly softer than expected at 0.3% M/M and 6.5% (from 6.4%). Price rises were still broad-based with gains for energy (7.5% M/M), services (0.5% M/M and 5.1% Y/Y), including housing (0.7% M/M) still continuing, amongst others. Prices of used cars which rose sharply over the previous year, this time eased 3.8% M/M, contributing to the ‘softer’ core inflation. The market reaction was interesting. Over the previous months, inflation data mostly surprised on the upside. This not being the case today, apparently triggered some relief among investors US bonds were captured in a corrective short squeeze. US yields are easing between 7.5 bps (5-y) and 2.0 bps (30-y), the belly of the curve outperforming. A bit strange, real yields decline more than inflation expectations. For now, we don’t draw any firm conclusions. A correction after a stretched directional move. European bond markets joined the US reaction, but clearly underperformed. German yields are losing between 4.2 bps (5-y) and 1.0 bp (30-y). Changed in euro swap yields even are close to non-existent with investors looking forward to Thursday’s ECB meeting. Today’s pause also provided some further relieve for peripheral European bond markets with 10-y spreads narrowing up to 3 bps (Italy, Spain, Portugal). European equities further reversed this morning’s losses, but currently fail to return in to positive territory (EuroStoxx50 -0.2%). US equities are gaining up to 2% (Nasdaq).
• On FX, the correction in US yields hardly hurt the dollar. USD/JPY is testing the 125 handle. DXY is holding close to the 100 pivot. Euro bulls also should be disappointed with EUR/USD reaction. The pair briefly touched the 1.09 area, but currently even trades marginally lower near 1.0875. Sterling trades with a minor positive intra-day bias (EUR/GBP 0.8340, cable 1.3040) despite mixed labour market data this morning. UK CPI data will be published tomorrow morning.
• The World Trade Organization (WTO) said Russia’s war with Ukraine will slow the economy’s rebound from the pandemic. Already stretched supply chains are being pressured further with trade disruptions visible everywhere from commodities over metals to energy. In addition, China answers any Covid outbreaks with new lockdowns. This again disrupts seaborne trade, according to the organization. Global trade in goods was revised lower from 4.7% to 3% for 2022. In 2023, trade could grow with 3.4% though there were downside risks to that estimation, including food insecurity. The WTO also shaved 1.3 ppts of previously expected GDP growth, to 2.8% before picking up to 3.2% next year.
• Ireland is mulling to lower the VAT on energy bills as it seeks way to cushion an escalating cost-of-living crisis, resorting to measures that were already taken by a number of other European countries. The plan under discussion would lower the rate on electricity and gas from 13.5% to 9% on a temporary basis, Ireland’s national broadcaster reported today.