German inflation rises again in February

Germany CPI inflation hit 5.5% in February, greater than the consensus prediction of 5.4%, largely on the back of higher energy prices. With the conflict in Ukraine sending energy prices higher still, the elevated price growth in the Eurozone’s largest economy will remain a key concern for both the ECB and German policymakers. The Eurozone aggregate inflation figure is due out today, with analyst consensus predicting 5.6% y/y, up from 5.1% in January, but premature tightening is highly unlikely given the ongoing concerns in the region presently.

As the conflict in Ukraine has intensified, so have sanctions against Russia, with a number of new measures brought in yesterday. The EU has agreed to cut seven Russian banks from the SWIFT network, although this excludes Sberbank and Gazprombank and there will be 10 days before it is enforced. The EU is also reportedly looking into assessing Ukraine's bid to join the bloc. Meanwhile, an increasing number of major international firms are cutting their dealings with Russia, including the world’s threelargest container shipping companies, Maersk, MSC and CMA CGM. In Russia, the central banks has banned payments of coupons to foreign owners of rouble-denominated bonds as it tries to support the currency with more capital controls.

In The US, the ISM manufacturing survey came above predictions, at 58.6 compared with 58.0. Demand was especially strong but the survey’s subcomponents did indicate that the supply chain pressures, which had been steadily improving for months, are once again starting to impeded activity as delivery delays rose to the highest reading since October. Nevertheless, 16 out of 18 industries reported growth.

Canada’s real GDP growth surprised to the upside in Q4 in data released yesterday, coming in at 6.7% annualised (compared with predicted 6.4%). This was up from 5.5% in the previous quarter and in 2021 as a whole, growth was 4.6%. The strong fourth quarter was despite the Omicron variant of Covid-19 which dampened activity through the period, and given that the growth was largely driven by business investment and inventory replenishment, it bodes well for the ongoing recovery from the pandemic. The central bank is due to meet today, and the stronger-than-anticipated growth report makes the predicted 25bps hike (to 0.50%) even more likely, as the bank now has even more room to focus on curbing price growth. CPI inflation was 5.1% y/y in January.

 Australian GDP also exceeded expectations in Q4, hitting 4.2% y/y compared with 4.1%. This followed a 4.0% expansion in the third quarter. Growth was driven by strong consumer demand in the period after the country emerged from a protracted lockdown as it grappled with the coronavirus.

The Etihad Rail project in the UAE has hit a new milestone as the tracks between Abu Dhabi and Dubai are now linked. While a launch date for the freight and passenger service is yet to be announced, the railway is another important link in the UAE's multimodal transport offering, and will support the major logistics activities at Jebel Ali, KIZAD and other ports, and the multiple air freight facilities. Once completed the railway will span all seven emirates, and is projected to create economic opportunities of USD 55bn.

Today’s Economic Data and Events

9:00 India Markit manufacturing PMI, February

14:00 Eurozone CPI inflation, February, % y/y. Forecast: 5.6%

16:00 US MBA mortgage applications, week to February 25

17:15 US ADP employment change, February. Forecast: 375,000

19:00 Bank of Canada rate decision. Forecast: 0.50%

Fixed Income

• Developed market bonds surged in rapid movement as investors cut their expectations for central bank rate hikes considerably. Fed funds futures pricing now is pricing in less than a 100% certainty that the Fed will raise rates at the March FOMC, deterred by the crisis in Ukraine and its impact on financial markets. We still expect the Fed to follow through with a rate hike given that the inflation picture is unlikely to have improved in the last month and indeed with the move upward in oil prices will probably have gotten considerably worse.
• Yields fell across developed markets though US Treasuries showed some loss of momentum later in the session. Yields on the 2yr UST fell 9bps to 1.3407% while the 10yr was richer by around 10bps to 1.7275%. In European markets the moves were even more exaggerated. The 2yr Schatz yields dropped almost 21bps to -0.746%, its lowest level since the start of December last year, while the 10yr bund yield fell 21bps to move back below zero. In the UK moves were on a similar scale with 2yr gilt yields down by 23bps to 0.804% and the 10yr gilt yield down 28bps to 1.126%.
• Movements in emerging markets was more scattershot with some EU EM bonds managing to catch the same rally—Polish 10yr yields for instance fell 15bps—while non-European emerging market bonds looked heavy. South African 10yr yields added 4bps t o9.857% while Indian yields also rose, up 2bps to 6.77%. Action on Turkey’s 10yr USD Eurobond was relatively limited.
• Local bonds have moved higher, abetted by high oil prices and the relative strong rating profile of many of the issuers in the UAE. The BUAEUL index added 0.4% overnight while the OAS narrowed by 12bps to 138bps.

FX

• Currency markets rushed toward havens overnight with the dollar rallying against nearly all peers. The broad DXY index added 0.7% with gains coming mainly from EURUSD, down 0.8% to 1.1125, as the European economy looks squarely in the crosshairs of any Russian economic retaliation to sanctions. GBPUSD also sold off sharply, down 0.7% to 1.3325. USDJPY managed to extend its haven move with the pair down by a bit less than 0.1% at 114.92.
• Commodity currencies tumbled amid fears for global growth. USDCAD rallied despite moves higher in oil prices, up by 0.5% to 1.2743. AUDUSD fell 0.15%, seemingly ignoring the RBA entirely and settled at 0.7252. NZDUSD fell 0.24% to 0.6756.

Equities

• There was a marked uptick in risk-off sentiment in equity markets yesterday with global indices seeing a broad sell-off. In Europe, the CAC and the DAX, the key French and German indices, both lost nearly -4.0% as Germany was also hit by a high inflation print – something the current crisis will only exacerbate in the coming months.
• The sell-off continued in the US as the Dow Jones, the NASDAQ and the S&P 500 all dropped -1.6% to -1.8%, and so far this morning in Asia all major indices are again trending lower.

Commodities

• Oil prices wrenched higher for another day with WTI up 8% to USD 103.41/b and Brent futures adding almost 4% to USD 104.97/b. Both contracts have added more than 4.5% in early trading today as OPEC+ is set to decide policy and is almost certainly likely to keep policy unchanged.
• The OPEC+ joint technical committed revised their expectation for a market surplus in 2022 lower by 200k b/d to 1.1m b/d on average for the year. A smaller market surplus may serve as an early sign that OPEC+ could unwind its cuts at a faster pace but we still expect the producers’ alliance to endorse the slow and steady pace of 400k b/d of additional volumes, even as markets are screaming out for additional oil flows, particularly amid the geopolitical crisis in Eastern Europe.
• The US and other allies will release 60m bbl from strategic reserves to help to take some of the sting out of the high oil prices though given the febrile geopolitical atmosphere, the release is unlikely to have a material effecting on changing the trajectory of prices.

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