March 1, 2023

Markets Today: I won’t back down 

Upside surprises to European inflation out of Spain and France have seen ECB pricing and European yields push higher, with some bleed through into the US. Elsewhere, US equities are little changed, shrugging off soft consumer confidence data, but are and on track for a monthly decline of more than 2%.

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Overview:  Europe’s Inflation Worries

  • Spanish and French CPIs stronger than expected
  • European yields push higher across the curve
  • US consumer confidence softer than expected
  • S&P500 little changed
  • Coming up: AU GDP & CPI indicator, China PMIs, Germany CPI, US Manufacturing ISM

“There ain’t no easy way out (I won’t back down), Hey I will stand my ground, And I won’t back down” – Tom Petty

Upside surprises to European inflation out of Spain and France have seen ECB pricing and European yields push higher, with some bleed through into the US. Elsewhere, US equities are little changed, shrugging off soft consumer confidence data, but are and on track for a monthly decline of more than 2%.

The key data overnight was French and Spanish CPI. On an EU harmonized basis, Spanish CPI was 6.1% y/y from 5.9 and 5.7% expected (though the monthly print was just 1 tenth higher at 1.0% from 0.9%). French CPI was 7.2% y/y from 7.0% and 7.0% expected. The data are suggestive of upside risk to German CPI tonight and EU CPI on Thursday where expectations are currently for a decline to 8.3% y/y from 8.6%. That the flow of inflation data is as yet not playing nice has seen European rates higher. After 50bp on 16 March, markets now price about a 50% chance of a repeat 50bp in May and a peak rate of 3.9% by year-end.

ECB chief economist Lane told Reuters that rates could be held in restrictive territory for some time, “It could be quite a long-lasting period, a fair number of quarters.” Lane left room for optimism on inflation, saying “for energy, food and goods, there’s a lot of forward-looking indicators saying that inflation pressures in all of those categories should come down quite a bit, ” but also emphasising that the ECB needs to see progress on underlying inflation “we’re all signed up to the criterion that sufficient progress in underlying inflation is important.

European core yields were higher across the curve. German 2yr and 10yr bund yields were 7bp higher to 3.13% and 2.65% respectively. Higher European yields spilled over to the US, the 10-year yield making a fresh high of 3.98%, but once again meeting resistance near 4%. Yields fell back, helped by a weaker consumer confidence report, and the 10-year rate is currently up only 2bps on the day at 3.93%.

In the US data flow, Consumer Confidence out of the Conference Board fell to 102.9 from a downwardly revised 106.0, below consensus for a small lift to 108.5. The decline was entirely in the expectations component, down to 69.7 from 76.0, while the present situation index was up a little to 152.8 from 151.1. The goods trade balance widened slightly more than expected to $91.5b in January, while the Chicago PMI fell about a point to 43.6 against expectations for a modest lift.

Despite European data adding to the case for more hikes and softer consumer confidence, US equities are currently little changed. The S&P500 is up currently flat on the day and on track for February losses of around 2.3%. Gains on the day were led by manufactured materials and communication services, offset by losses in energy and utilities. The Nasdaq is up 0.2%. In Europe, the Euro Stoxx 50 lost 0.2%, but is up 1.8% over the month. the FTSE 100 was 0.7% lower yesterday.

There was little to note in FX markets. The DXY managed a 0.2% gain, rising to 104.85 on the DXY. The euro was 0.2% lower, while the pound held on to yesterday’s gains, down just 0.1% against the dollar at 1.206, having traded through 1.21 overnight. UK PM Sunak headed to Belfast to sell the deal to Democratic Unionists on the “Windsor Framework.” The AUD was little changed, though is on track to end February the worst performing G10 currency, now down 4.6% over the month, with NZD and JPY also underperformers following the significant global rates selloff through February on fears of a tighter for longer global monetary policy cycle.

In other data flow, Canadian Q4 was weaker than expected, coming in unchanged vs expectations for a 1.6% annualised gain. The soft outcome helped reinforce market pricing that the Bank of Canada will pause over the next couple of meetings with just 8bp prices over March and April, consistent with the BoC’s its earlier guidance. In NZ, the ANZ business outlook survey showed further modest increases in activity indicators, but off a very low base.

In Australian data yesterday, January retail sales rose 1.9% m/m, above the consensus for 1.5%. The data confirms that it was indeed seasonal distortions at play in the weak read in December rather than a warning sign of a collapsing consumer. Looking through the volatility, the overall level of nominal retail sales, which is heavily skewed towards goods, has been broadly flat at elevated levels since September (See NAB data note)

Coming Up

  • AU GDP and the Monthly CPI Indicator are on the domestic calendar this morning. For GDP, consensus is for a 0.8% q/q gain (NAB looks for 0.6%), with a strong rise in net exports set to more than offset a drag from inventory accumulation. The Q4 data is not an especially timely view of the economy, but it does round out the picture of the state of the economy in Q4, notably the extent of strength in household services consumption. The indicators of the broader nominal picture, including earnings indicators, will be in focus for the RBA as much as activity.
  • The Monthly CPI Indicator is an imperfect guide to the quarterly CPI, with only partial coverage, especially in January. Consensus is for a decline to 8.1% from 8.4%. NAB’s pick is 7.9%. We will be focused on updates to the key rents and new dwelling components.
  • NZ Building consents are released this morning.
  • Chinese PMI data are expected to improve. The official Manufacturing PMI seen at 50.6 from 50.1 and the non-Manufacturing at 54.9 from 54.4. Caixin Manufacturing PMI is expected to jump from 49.2 to 50.7.
  • In Europe is German CPI, will it match the upside surprises to Spanish and French Inflation ahead of the Eurozone print on Thursday?
  • The US gets the ISM Manufacturing Survey.
  • From central banks is BoE Governor Bailey, ECB’s Nagel and Villeroy, and the Fed’s Goolsbee.

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