Today’s ECB policy statement very much resembled the one from March, especially when it comes to future monetary policy. From a market point of view, it looked like it even too much, with both the euro and short-term European yields losing out in a first reaction as they (and we) anticipated more urgency when it comes to policy normalization in light of worsening inflation dynamics. ECB Lagarde stressed the only subtle difference, namely that the governing council reinforced its judgment that net asset purchases should end in Q3. The ECB holds dearly to its sequencing principle of first ending net asset purchases and next implementing rate hikes. The official wording is “some time after”. At first, Lagarde repeated last month’s response that this implies optionality, gradualism and flexibility. Later, in a potential slip of the tongue she said that in practice it could mean anything ranging from a week (!) to several months. This still leaves all meetings starting from July open for a potential rate lift-off. Turning to the economic and inflationary assessment, Lagarde emphasized the abnormal brief period (5 weeks) in between meetings. The war on Ukraine is nevertheless having a clear impact. Growth remained weak in Q1 with little improvement expected on the horizon. There was a special reference to the rising cost of living costs with future risks to the growth outlook tilted to the downside. Higher energy prices are the main culprit for the unexpected surge in March inflation, though the ECB noted a sharp rise in food prices and a more widespread inflation level overall (pandemic-related bottlenecks, demand-driven and energy prices filtering through production processes). Wage growth remains muted overall. In an interesting twist, the ECB refers to longer-term inflation expectations derived from financial markets as “largely standing around 2%”. Judge for yourself: 5y5y fwd EMU inflation swap at 2.34% (highest since 2013) and 10y EMU inflation swap at 3% (record high). It does warrant close monitoring according to Lagarde. Inflation risks remain tilted to the upside. We interpret the market response as a vote of no-confidence in ECB policy. European yield curve steepen. The very front end cedes around 3 bps, lacking firmer guidance on a first hike, while the very long end rises by up to 10 bps as inflation expectations spiral further out of control. The combination is a deadly combo for a currency with EUR/USD sliding below the previous YTD low of 1.0806. The next technical reference in case of a confirmed break is the 2020 low at 1.0636. The weaker currency… you guessed it… worsens the ECB’s inflation headache. US yields gain 6 to 7 bps across the curve today following a 2-day correction, giving the dollar some new momentum as well. The trade-weighted greenback is back above 100.
The Turkish central bankkept policy rates steady at 14%. The status quo was expected and comes even as inflation soared beyond 61% y/y. Producer prices hitting well in the triple digits suggest more pipeline-price pressures. The view of the CBRT is unaltered in that current inflation is largely driven by external effects (energy, geopolitics and strong negative supply (chain) shocks). These effects should fade eventually. Instead of jacking up policy rates – the lowest in the world when adjusted for inflation – it rather wishes to further support liraization with measures that include FX sales by state banks. The Turkish lira was unaffected by today’s decision, trading around the EUR/TRY 16 pivot in the aftermath.
Swedish inflation quickened more than expected in March. Headline inflation rose 1.8% m/m to a 33-year high of 6% y/y. The central bank’s preferred CPI gauge with a fixed interest rate (CPIF) sped up to an even higher 6.1% y/y (1.7% m/m). Excluding energy, prices rose 4.1% y/y, up from 3.4% in February. The numbers raise pressure on the Riksbank, which only recently started preparing markets for a monetary shift. Governor Ingves said in March that rates would probably have to be raised sooner than in the year 2024 forecasted in February. It marked the start of a sharp rise in Swedish money markets and short-term swap yields. That move continues today. The 2y swap yield (+6 bps) hits a new cycle high. The krone strengthened vs the euro to EUR/SEK 10.29.