Central banks are not near the end of their policy normalization cycles

Markets

German yields rebounded another 6.5 bps across the curve yesterday. US yields ended over 10 bps higher at the front end (2-3y) with gains at the longer end limited to 1-3 bps (10-30y). The European trading session went without a splash. Early US eco data included unexpectedly strong increases for both the March Richmond Fed Manufacturing index (-5 from -16 vs -10 expected) and consumer confidence (104.2 from 103.4 vs 101 expected). Details from the Richmond survey showed significant improvements in new orders and shipments and a more modest increase in employment. The forward looking part of the report suggests more wage pressure ahead with prices paid & received further mean reverting. The interesting part of the consumer confidence was that the survey date was March 20, in the midst of the regional banking crisis. The stronger number suggests that the strong labour market trumps any worries about potential consequences of the collapse of SVB and some others. On top, especially expectations for the future improved (+2.6). Just like PMI’s last Friday, markets didn’t respond to the numbers. For the moment, their reaction function is asymmetric. They need more convincing to shy away from the idea that central banks are at/very near the end of their policy normalization cycles. We stick to our view that more ground has to be covered. If not, central banks risk running behind the curve in the second half of this year. That suggest that more (hawkish) repositioning will follow if data hold their course. The first reference are EMU inflation numbers on Thursday and on Friday. The US Treasury continued its end-of-month refinancing operation yesterday with a $43bn 5-yr Note sale. The auction stopped through the WI yield with the bid cover in line with recent average (2.45). Overall, the auction thus fared better than Monday’s 2-yr Note auction. The Treasury sells $35bn 7-yr Notes tonight.

Yesterday’s bond sell-off no longer went hand-in-hand with rebounding stock markets. Main indices managed a slightly positive close in Europe and suffered small losses in the US. EUR/USD did extend Monday’s rebound with the pair finishing an inch away from 1.0850 compare to opening levels at 1.08. EUR/GBP closed broadly flat at 0.8790. We expect this week’s trading dynamics to remain at play today given the very thin eco calendar. We must add that the vigor already diminished yesterday compared to Monday and that it could weaken further still today. German/French consumer confidence and US pending home sales are the unattractive highlights. Central bank speeches remain a wildcard.

News & Views

Australian inflation eased from 7.4% to 6.8% in February, representing a bigger-than-expected deceleration. Core inflation retreated from 7.5% to 6.9%. Most components experienced milder yet still-high price increases. Housing (9.9%) and food (8%) showed the steepest inflation, followed by household furnishings (6.6% and) recreation (6.4%). Prices of education, insurance/financial services and alcohol & tobacco even accelerated again in year-on-year terms. The second monthly decline in a row strengthens the RBA’s view that inflation indeed peaked in Q4 last year. Odds for another rate hike diminished significantly in the wake of the recent turmoil on financial markets. With today’s data, markets not only assume a pause in the tightening cycle in April, in their view it is also the end. The RBA lifted rates by 350 bps to 3.6% over the past year. Australian swap yields ease 4.7-8.8 bps across the curve with the long end outperforming. The Aussie dollar holds steady around the 0.67 big figure.

Greek PM Mitsotakis called general elections for May 21. That’s two months earlier as the government suffers from a wave of protests over the country’s deadliest train crash in its history. Support for Mitsotakis’s ruling centre-right party has fallen. But the New Democracy party still has an opinion poll lead over Syriza, the main contender currently. The elections will be the first under the recently introduced system of proportional representation, making it difficult for a single party to form a government. If coalition talks fail, a second ballot under a semi-proportional system is expected to be held by the beginning of July at the latest.

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