Tightening the purse strings: EU demands fiscal restraint

(Danske Research Team)

Market movers today

After Fed chair Powell’s testimony, US macro data releases are back in focus to gauge the risk of a reacceleration in the hiking pace. Today initial jobless claims are on the agenda, ahead of the big labor market report tomorrow.

In Sweden, January data for production, new orders, household consumption, and the monthly GDP indicator is on the agenda. Riksbank’s Bunge and Jansson will also speak today.

The Bank of Japan (BoJ) meeting early Friday morning will be the last one for current governor Kuroda. We still think BoJ will tweak its yield curve control in the short term. It is not likely to happen this time, but we were also surprised the last time they did it in December. Either way, we think it is a matter of time and could happen during Q2.

The 60-second overview

Fed: In his second Congress testimony, Fed chair Powell stressed that no decision has been made on the size of this month’s rate increase, stressing again the FOMC’s data dependence. Yesterday’s data pointed to an ongoing strong labor market. US companies added 242,000 jobs in February according to the ADP employment report and job openings fell less than expected in January to 10.8 million from 11.2 million, according to the JOLTS report. Markets price in a 75% chance of a 50bp hike from the Fed at the March meeting now.

EU fiscal rules: Updated fiscal policy guidance from the European Commission urged EU countries to start phasing out government support programs after the pandemic and energy crisis, as Brussels prepares to reinstate Stability and Growth Pact (SGP) rules in 2024. However, the planned reinstatement coincides with ongoing discussions to overhaul the SGP rules, where consensus remains yet elusive (see also Euro macro notes – EU fiscal rules: An evolution rather than a revolution, 21 November). Especially Germany remains skeptical about the idea of countries striking individual deals on their public finances with the Commission. Should a reform fail to pass later this year, the old 3% deficit and 60% debt target would reapply. However, the Commission might still apply some leeway in the interpretation of the rules, as a strict application could trigger a slump in public investments just at a time when demands from the green transition, digitalization, energy, and defense are piling up.

China: China’s inflation rate slowed more than expected to 1% in February. Factory gate prices also continued to fall for a fifth consecutive month. Despite the rapid recovery, China has so far not emerged as a major reflationary force for the global economy, although upside risks still persist (see also Research China – NPC sets modest growth target at ‘around 5%’, 6 March and China Macro Monitor – Strong growth burst in early 2023, 1 March).

FI: European yields staged a modest rally in the 10y point, leaving most EGBs 4bp lower on the day, with the exception of Italy where the BTPs-Bund spread tightened 5bp vs. Bunds to stand at 177bp. The curves bull flattened from the long end, which saw 30y yields down by 6-11bp subject to each jurisdiction. The move was accelerated by a stronger-than-expected ADP report. After two days of Powell being in congress, a 50bp rate hike here later this month is clearly in play. Friday’s labor market report and next week’s US CPI are focal points. Markets have repriced ECB and Fed policy rate peaks to 4.16% and 5.59% respectively.

FX: Apart from some volatility during Powell’s testimony before the House, EUR/USD traded mostly in a tight 1.0540-55 range. Now the cross, as G10 FX in general, has its eyes on the NFP report tomorrow amid data-dependent Fed and with 42bp priced for the March meeting. USD/JPY remains elevated, though the JPY has recovered somewhat and the cross is now below 137. EUR/SEK is trading just above 11.30 ahead of today’s activity data at 08:00 and two Riksbank speeches, Bunge and Jansson, all potential market movers. The NOK has erased some of its losses overnight after EUR/NOK briefly visited 11.30+ and ahead of the CPI data tomorrow.

Credit: Yet another day with high interest in the primary market and slight profit-taking in the secondary corporate bond market. iTraxx Main ended 1bp wider at 76bp while iTraxx X-over widened 2bp to 396bp. In the primary market, Vestas Wind Systems A/S issued a new EUR500m Sustainability-Linked Bond with 3.25-year maturity at MS+60bp (coupon 4.125%) after having attracted significant interest with a final order book above EUR2bn.

Nordic macro

In Sweden, January data for production, new orders, household consumption, and the monthly GDP indicator is on the agenda today. January data thus far, consisting of hours worked and real goods trade balance, has developed stronger than expected, and we expect manufacturing production to bounce higher on the back of a strong gain in new orders in the December reading. However, private consumption most likely drops again thus continuing to paint a picture of a two-speed economy, with a stronger business sector and weakness within household consumption. Vice Governors Aino Bunge and Per Jansson will also hit the wires today with speeches at separate events.

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