Market focus: From the risk of US tariffs to the potential positives from an end to the war in Ukraine

Market

‘Great progress’, ‘We’re close but not there on inflation’, ‘We don’t get excited about one or two good readings, and we don’t get excited about one or two bad readings.’ These are some semi-live comments from Fed Chair Powell at its second day hearing before Congress in the wake of blow-out US January inflation figures, published less than two hours earlier. Anyway, in those figures, the progress on inflation was well masked. US January headline inflation jumped 0.5% M/M (from 0.4% and 0.3% expected) rising the Y/Y measure to 3.0% (from 2.9%). Similar story for core CPI inflation at 0.4% M/M (from 0.2%) with the Y/Y measure reaccelerating to 3.3% from 3.2%. Food (0.4% M/M) and energy prices (1.1%) both also services inflation (0.5% M/M and 4.3% Y/Y) don’t suggested a that a swift return toward 2.0% was gaining momentum. Idem for shelter prices (0.4% M/M, 4.4%). The market reaction was straight forward. US yields closed between 7.2 (2-y) and 9.8 bps (5-y) higher. US markets now only see a next 25 bps Fed rate cut fully discounted in the final quarter of the year. The fact that the biggest yield rise occurred at the belly of the curve suggests that markets feel that even in a scenario of persistent inflation, the (political) bar remains high of the Fed to resume raising rates. Markets for now only consider a higher-for-(much)-longer scenario. Still, US yields closed off the intraday peak levels. A decline in the oil price (Trump suggesting upcoming Ukraine peace talks) capped a rise in inflation expectations. Even so, the US 10-y $42 bln Note sale, despite the higher yield, only attracted mediocre investors interest. German yields in sympathy gained between 5.3 bps (2-y) and 3.3 bps (30-y). US equities opened about 1.0% lower on tighter interest rate conditions post the CPI release, but easily reversed most of the initial loss. Dollar gains were limited and short-lived except for USD/JPY (close 154.4 from 152.5). Especially the euro showed remarkable resilience. Interest-driven USD strength, if any, was counterbalanced by the prospect that an end to the war in Ukraine might be on the horizon after Trump’s phone call with Putin kickstarted the process.

Asian equity markets this morning mostly show solid gains. The market focus is shifting from the risk of US tariffs to the potential positives from an end to the war in Ukraine. This evidently applies to European markets. EUR/USD this morning jumps to currently trade near 1.043. This theme probably also will set the tone on European markets later today. Aside from the Ukraine risk-on , the eco calendar contains the US PPI and jobless claims data. They probably won’t amend the higher-for-longer message from yesterday’s US CPI. The US 2-y yield is close to the key 4.40% resistance area. However, for a break the market probably has to reconsider Fed rate hikes. We’re not that far yet. In FX, the euro is gaining traction. A break beyond 1.0442 would open the way to the 1.0533/1.0630 previous correction highs. UK Q4 GDP at 0.1% Q/Q reported this morning was less worse than expected, but the details (poor private consumption and investments) confirms an ongoing uphill battle for the UK economy. Sterling gains modestly (EUR/GBP 0.834).

News and views

The European Commission yesterday confirmed that it will cut the settlement cycle for stock, bond and fund trades from two days to one. Single-day securities settlement will begin on October 11 2027, aligning the switch with those in the UK and Switzerland. The move will bring a significant reduction in margin requirements for market participants and would also unlock important benefits, notably by achieving risk reduction, margin savings and the reduction of costs linked to misalignment with other major jurisdictions. The US shortened its settlement time in May of last year with countries like Canada, Mexico, India and China also already on the T+1 scheme.

News agency Bloomberg runs an article citing at least six EU member states who would be pushing the EC to allow more flexibility on refilling requirements for gas storage ahead of next winter. The Gas Coordination Group meets today. Targets are currently designed to ensure that inventories are 90% full by November 1st, but current levels (48% full on average) are relatively low because of cold weather, low wind generation and loss of Russian supplies. There is concern that overly strict targets are at least partly responsible for the surge in gas prices to the highest level in two years’ time.

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