• Yesterday’s US price action already suggested that markets were preparing for some kind of ‘post-Ukraine normalcy’. US equities more than reversed initial losses. Yields returned to well-known territory. Fed officials held the line that, at this stage, geopolitical developments don’t change the Fed policy roadmap. This morning’s first reaction on European markets understandably was more guarded as headlines indicated that a battle for the Ukraine capital Kyiv could start any time. The impact of the conflict for neighboring Europe also will be deeper and more persisting (cf infra comments Lane). However, as trading developed sentiment in Europe also improved markedly. Comments that Russian president Putin might be prepared to hold talks with Kyiv on a neutral status of the country maybe supported sentiment further. European equities are building out gains of up to 3%. Even so, the EuroStoxx 50 remains below 4000 reference. EMU interest rates finally also joined the (geopolitical) normalization trade. Eco data were no major focus for trading. Still, higher than expected French and Belgian CPI’s were a reminder that the debate on inflation will only intensify. German yields are rising 2.0 bps (2-y) to 5.5 bps (5-y). The German 10-y yield regained the 0.20% mark. The EMU 10-y swap (0.85%) even nears the cycle top of 0.90%. Despite the rise in core yields, the risk-on caused a corrective narrowing in EMU peripheral spreads (10-y), Greece (-8 bps) and Italy (-4 bps) outperforming. US spending and income data were close to expectations. The PCE deflators, closely watched at the Fed, rose as expected (general 0.6% M/M and 6.1%Y/Y; core 5.2% Y/Y from 4.9%) but didn’t accelerate the market dynamics. This also applies for solid January durable goods orders (1.6% M/M). Still, US yields are also rebounding further, rising between 1.0 bp (30-y) and 2 bps (5-y). The US 10-y yield tries to regain the 2% handle. Oil eases back below $97/b and wheat also eases about 7% off this morning’s multi-year peak levels. However, much more is needed to ease the inflationary threat from this week’s broad-based jump in commodity prices.
• As was often the case of late, the repositioning on the FX market again was far less dynamic that in other markets. The TW dollar (DXY) is losing a few ticks (96.85). The presumed safe havens also are only losing modest ground. USD/JPY is going in the 115.50 area. EUR/CHF tries to regain the 1.04 level. The EUR/USD performance (1.1225) remains unconvincing. It doesn’t look easy to regain the previous neckline support at 1.1286. Sterling suffers from a further decline in (ST) yields. EUR/GBP trades near 0.8390 (from 0.837). In the CE region, the Czech koruna (EUR/CZK 24.7) regained a big part of this week’s Ukraine driven losses The zloty (EUR/PLN 4.627) and the forint (EUR/HUF 365.7) have some more work to do.
• Belgian inflation accelerated again in February, rising by 0.63% M/M to 8.04% Y/Y (from 7.59% Y/Y in January). It’s the highest inflation level since March 1983. Energy prices rise by 60.99% Y/Y and contribute 5.03 percentage points to the total inflation. Nevertheless, core inflation accelerated as well in February, from 2.98% Y/Y to 3.28% Y/Y. Food inflation increased from 2.26% Y/Y to 3.84% Y/Y with inflation for rents accelerating from 2.15% Y/Y to 2.49% Y/Y. Services inflation slowed from 3.35% Y/Y to 3.2% Y/Y. Inflation based on the national health index rose from 7.12% Y/Y to 7.56% Y/Y in February. French inflation rose by 0.8% M/% to 4.1% Y/Y (from 3.3% and vs 3.7% forecast). Both inflation prints already suggest upward risks to next week’s EMU print. Consensus currently expects a rise from 2.3% Y/Y to 2.5% Y/Y for core inflation and from 5.1% Y/Y to 5.3% Y/Y for the headline reading.
• Sources close to the matter told Reuters that ECB chief economist Lane told fellow policymakers that the Ukraine conflict may reduce EMU growth by 0.3%-0.4% this year in the base scenario (currently 4.2% expected). In a downside risk scenario, the hit could be as large as 1, in a relatively mild one there would hardly be any impact. Lane didn’t update inflation prognosis yet, but warned for a significant upgrade to the December projections. Inflation could possibly be above the ECB’s 2% inflation target over the complete policy horizon. The current inflation trajectory is 3.2%, 1.8%, 1.8% for 2022-2024.