A weaker Euro is further complicating matters for the ECB

Markets

Core bonds continue to feel the heat as the Brent crude price cruises above the $100/b mark. Again despite all efforts to lower them. The latest initiative came from the US Treasury which said that it would allow countries to buy Russian oil stranded at sea. As long as the US and Iran continue trading jabs with the latter blocking the supply chain, oil prices won’t retreat. US President Trump this morning warned that the US has plenty of time in the war against Iran and added “watch what happens to these deranged scumbags today”. The German yield curve continued bear flattening with yields rising by up to 4 bps at the front end of the curve. The German 10-yr yield (+2.5 bps) closed at the second highest level (2.96%) since 2011 and is ready for a take at key 3% resistance. In the UK, bear flattening turned into a slight bear steepening as rising inflation expectations start impacting the long end of the curve in absence of monetary responses. UK yields rose by 8.8 bps (2-yr) to 9.6 bps (30-yr). For the first time, US Treasuries also faced significant selling pressure at the front end of the curve as US money markets start pricing out rate cut bets this year. The US yield curve bear flattened with yields rising by 0.3 bps (30-yr) to 9 bps (2-yr). From a technical point of view, the 2-yr yield broke the 3.6% resistance barrier which capped rangebound trading between September of last year now. That also coincided with a longer term downward trend line and the 200d moving average in a technically significant move. On FX markets, the dollar grows stronger everyday. The trade-weighted greenback moved beyond the YtD high at 99.70 and is has its sights at the November top at 100.40. EUR/USD loses the 1.15 barrier this morning with the August low at 1.1392 being the next target. A weaker euro is further complicating matters for the ECB and (upward) inflation risks when it meets next week. USD/JPY is back at January levels (just below 160) which prompted rate checks by the NY Fed and talk of potential coordinated interventions. This morning, the verbal treat only comes from the Japanese corner. Risk sentiment suffers from the lasting conflict with key European indices yesterday losing 0.5% to 1% and losses in the US exceeding 1.5%. We expect these underlying market dynamic – high oil prices, rising interest rates, stronger dollar, weaker equities – to remain in place going into a very uncertain weekend. Today’s eco calendar contains (outdated) January PCE deflators in which goods inflation is the one the watch. The University of Michigan’s March consumer survey could be the more important one from a market point of view. Interviews are conducted through the Monday before the release implying that inflation expectations will be impacted by the (start of) the conflict in the Middle-East and could further dent bond sentiment. US durable goods orders (January) and JOLTS job openings (January) are also in today’s data mix but will play second fiddle. 

News and views

Rating agency S&P warned that a sustained rise in energy prices could result in a lower Hungarian credit rating. With Hungary holding BBB- with a negative outlook (confirmed in October), such a downgrade would mean the country loses its investment grade status. S&P’s head analyst for the EMEA region said that if gas prices would develop similarly to 2022, Hungary’s current account could deteriorate significantly, inflation would rise and the forint could dramatically depreciate, pressuring “their fiscal indicators and their rating”. S&P said that the risk of a downgrade is compounded by pre-election fiscal stimulus measures which - unlike those in 2022 - are expected to have a longer-lasting fiscal impact. Hungary’s budget deficit at the end of February reached HUF2.1tn, which was already 40% of the full year target of 5%. The next S&P rating review is on May 29.

Fed vice-chair for supervision Michelle Bowman announced yesterday that US banks will get relaxed capital proposals from regulators in the coming week. While adopting the final package of Basel III rules would result in a small increase in capital requirement, Bowman said that the other proposed changes to surcharge for global systemically important banks would more than offset that. “These changes to the capital framework eliminate overlapping requirements, right-size calibrations to match actual risk and comprehensively address longstanding gaps in our prudential framework,” Bowman explained. The reform package is designed to encourage bank lending and to reverse the trend of mortgage activity increasingly being done by non-banks.

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