10 February 2022

3 mins

ECB still expects inflation to slow

Inflation projections from the ECB maintain the line that price growth will ease off strongly, falling back below the bank’s target range of 2.0% next year to an average 1.7%. However, this will come after 3.5% is hit this year. These are upward revisions of the 2.2% and 1.4% previously forecast. There has been some mixed messaging from the single currency’s bank over the past week, as the head of the ECB and the French central bank pushed back against the hawkish interpretation of last week’s meeting, while the German central bank head Joachin Nagel publicly pushed for a rate hike in 2022 yesterday. The Bundesbank is traditionally one of the more hawkish within the bloc.
The EU has announced plans to invest USD 43bn in its own semiconductor chip manufacturing capabilities. The pandemic has highlighted to many countries their huge reliance on a few key Asian manufacturers for their semiconductors, and are now pursuing greater resilience. The chip shortages have weighed on industries around the world, and in Europe the German automotive sector has been especially affected.
Covid-19 restrictions are steadily being eased around the world as infection rates and hospitalisations slow. In the UAE, capacity limits are set to be lifted in many venues, while in the UK, Prime Minister Boris Johnson announced yesterday that all remaining pandemic-related restrictions would be lifted a month early.

Today’s Economic Data and Events

Fixed Income

US Treasuries settled mixed overnight with yields on the front end of the curve rising steadily throughout the day while longer dated bonds benefitted from a healthy 10yr auction. Yields on the 2yr UST closed higher at 1.34%, up around 5bps while the 10yr yield fell 2bps to 1.942%. Elsewhere developed market bonds generally pushed higher with 10yr gilt yields down by 6bps to 1.427% and bund yields down by 5bps to 0.208%.
Among emerging market bonds Turkish 10yr government bonds rallied with yields falling 43bps to 20.99%, their lowest level this year. South African bonds also moved higher with yields down 7bps to 9.653%. Indian bonds pushed higher ahead of the RBI’s meeting with the 10yr yield settling at 6.789%.

Currency markets were relatively quiet ahead of the US CPI report out later today. In line with the dip in 10yr yields the dollar fell, down by 0.16% to 95.49 on the broad DXY index. EURUSD edged higher, up to 1.1425, a gain of less than 0.1%. USDJPY notched marginally lower to settle at 115.52 while GBPUSD remains steady at around 1.3540-13540.
Most of the action was provided by commodity currencies where USDCAD fell 0.3% in favour of the loonie to settle at 1.2670. AUDUSD closed up 0.46% at 0.72 while NZDUSD added more than 0.5% to 0.6684.

Equities

US markets continued their recovery yesterday, as all three indices recorded robust gains on the day. The NASDAQ led the pack with a 2.1% gain, followed by the S&P 500 on 1.5%, while the Dow Jones added 0.9%. All three remain lower than where they started the year, but their losses are narrowing.
European equities also gained yesterday. The FTSE 100 added 1.0%, with travel and hospitality stocks boosted by the prime minister’s announcement that all Covid-19 restrictions would soon be lifted. The CAC added 1.5% and the DAX 1.6%.

Commodities

Oil prices pushed higher overnight, waiting for a clear signal either from the geopolitical forces affecting the market or fundamentals. Brent futures settled up 0.8% at USD 91.55/b while WTI added 0.3% to close at USD 89.66/b. Negotiations over Iran’s nuclear programme have resumed among parties to the JCPOA with US officials warning about the immediate need for them to secure a deal.
Data from the EIA showed a draw in commercial crude stocks of 4.8m bbl last week while gasoline and distillate inventories also moved lower. Oil production ticked up by 100k b/d to 11.6m b/d.

Daniel Richards