• Today, investors still weighed the consequences Fed Chair Powell’s hawkish comments flagging a 50 bps rate hike in May and, why not, maybe also in June. Even after yesterday’s sharp rise in the US and EMU, there was still room for follow-through action. The focus turned from Fed speakers to ECB governors. Their tone evidently is moderate compared to Powell’s harsh talk. Even so, the need to re-anchor inflation expectations/start policy normalization isn’t questioned anymore. The debate between moderates and hawks is about the pace of normalization. ECB’ de Guindos admitted that inflation will probably stay higher for longer and that the ECB should monitor second round effects. Villeroy warned the ECB should not overreact to volatility in energy prices and focus on underlying inflation/medium developments. Even so, he subscribed the need for normalization. His plea for the EU to further extend the radius of the EU recovery fund to address the green transition illustrates that any support to address the fall-out of current crisis should come from fiscal policy, not from central bankers. A similar assessment came from German Fin Min Linder as he said that “the economy can rely on the government to apply its fiscal tools to avoid stagflation”. German yields today rise between 6.0 bps (5-y) and 2.0 bps (30-y), the 10-y surpassing the 0.50% barrier. The rise in EMU yields is still almost solely driven by inflation expectations. This might be a sign that markets feel that the ECB still has to solidify its anti-inflationary commitments. The fall-out of higher core yields on peripheral bond remains modest, with spreads trading little changed to even marginally tighter. US yields simply extend yesterday’s ascent rising between 6.5 /8.25 bps across the curve. Fed Bullard’s, dissenter at last week’s Fed meeting, reiterated his call that the Fed acting ‘faster is better’ and that policy quickly needs to be brought to a neutral level. Equities show ‘remarkably resilient’ to the bond market sell-off. US indices are gaining 0.75%/1.5%. The EuroStoxx50 also rises 1.25%. The oil rally is losing momentum (Brent $114.75 p/b) maybe provided some relief.
• On FX markets, the dollar still fails to capitalize on an ever widening (ST) interest rate differential. Equity strength maybe provided relief for the euro. Whatever, after declining to the 1.0965 area, EUR/USD currently even trades marginally strong in a daily perspective (1.1035). The yen remains in free-fall. USD/JPY jumped to 120.75. EUR/JPY (133.25) nears the 134.48/134.13 area (2021 peak levels). Markets also continue to question last week’s soft BoE rate hike (yields rebounding 7 bps at the short end). EUR/GBP dropped further to currently trade in the 0.8325 area.
• Belgian consumer confidence collapsed in March. The indicator dropped from +1 to -16, the lowest since October 2020, matching the record decline seen at the height of the Covid panic in April 2020. Belgian households assess the economic situation 12 months ahead as the worst on record. They also turn the most pessimistic on their future financial situation amid soaring inflation. Saving intentions weakened significantly for similar reasons. Expectations about the labour market have deteriorated as well but remain relatively robust compared to previous years. In separate Belgian news, the 10y yield today tested the 1% psychological level for the first time early 2018 amid building anticipation on ECB policy normalization. A break above the 1.06/1.07% resistance brings 1.43% as the next high-profile reference on the radar.
• The Hungarian central bank (MNB) as expected raised the base rate by 100 bps to 4.4%, double the 50 bps size the MNB started hiking with since the start of the year. The Ukraine war through trade channels, production chain disruptions, rising commodity prices and heightened uncertainty will negatively affect growth. However, the central bank is much more concerned on its impact on inflation. Headline inflation for 2022 is expected between 7.5 and 9.8% and will not reach the 3% target until 2024H1. Risks have increased and remain tilted to the upside. The MNB thus announced the current tightening cycle will last longer and will continue at a larger clip than before (>50 bps). Short-term Hungarian swap yields jump between 20 and 30 bps with a terminal policy rate expected near 8%. The Hungarian forint strengthens vs the euro to EUR/HUF 371.37.