- CPI inflation in the US came in at 7.9% y/y for February, in line with market expectations and another new 40 year high. On a monthly basis, the headline CPI index rose 0.8% m/m thanks to higher energy, food, and shelter costs. Core inflation also accelerated, rising by 0.5% m/m and up 6.4% y/y. The data for February came in largely before the war in Ukraine began which has disrupted access to energy commodities from Russia and subsequent inflation prints are likely to show more of an accelerating trend. With the February data coming in roughly as markets had been expecting, that will clear the way for the Fed to hike by 25bps at the March FOMC meeting with room for more aggressive tightening later this year should the economic disruption to the US economy from the crisis in Eastern Europe prove limited.
- The ECB surprised markets by moving to taper its asset purchases at a faster pace, dropping by EUR 10bn each month from April to June when they will hold at EUR 20bn per month. The ECB had previously targeted tapering to EUR 20bn by October. Moreover, the ECB noted that if inflation was not moving toward its target level then it would considering bringing asset purchases to an end as early as Q3 this year. The ECB will also move to raise rates “some time” after asset purchases have concluded which may mean a gap in tightening policy after APP has ended. The shift from the ECB was more hawkish than we or the market expected but doesn’t mean that a rate hike is imminent this year.
- Egypt’s CPI inflation rate accelerated to 8.8% y/y in February, compared to 7.3% the previous month. This marked the fastest pace of price growth since mid-2019 and is likely to head higher still as the country faces elevated food costs alongside rising petrol prices. Food and beverage, the largest single component of the basket rose 17.6% y/y and while the authorities have looked to give reassurances regarding food stores, the war in Ukraine will keep pressures pronounced over the near term at least. As such, we now anticipate that the Central Bank of Egypt will implement an initial 50bps hike to its overnight deposit rate at its upcoming March 24 MPC meeting as it looks to maintain the real interest rates which have proven attractive to international investors over the past several years. This would take the benchmark rate to 8.75%, representing the first rate hike since mid-2017.
Today’s Economic Data and Events
- 11:00 TU industrial production y/y Jan: forecast 8.4%
- 11:00 UK industrial production y/y Jan: forecast 1.9%
- 19:00 US U. of Michigan sentiment Mar: forecast 61
Fixed Income
- US Treasuries fell on the back of the US inflation print coming in at least as markets had been expecting. The 2yr UST yield moved up to around 1.73% before fading late in the session while the 10yr UST moved above the 2% level. European bonds were also generally weaker on the back of the apparent hawkishness from the ECB with bund yields up 6bps on the 10yr to 0.266% and Italian and Spanish yields rising sharply.
- Emerging market bonds showed a more mixed performance with further gains in South African 10yr bonds; yields fell by 19bps to 10.248%. In emerging Europe, the war in Ukraine is the clear and present danger to economic stability with Polish and Hungarian bonds selling off overnight.
FX
- Currency market volatility remains high with a sharp pop in EURUSD to more than 1.11 after the ECB meeting being unwound quickly over the rest of the trading day. The pair ended the day down 0.8% at 1.0986. USDJPY pushed higher to 116.14, a rise of 0.27%. GBPUSD also weakened overnight, falling by 0.7% to 1.3086.
- Commodity currencies showed some relief overnight. USDCAD fell 0.3% to 1.2769 in favour of the loonie while AUD added 0.49% to 0.7358 and the NZD gained 0.38% to 0.6865.
Equities
- The trading day started strongly in Asia as markets took their cue from the rebound seen in Europe and North America the previous day. Japanese stocks were the notable gainers, as the Nikkei and the Topix both added 4.0%, while the Shanghai Composite gained 1.2% and the Hang Seng 2.3%. In India, both the Sensex and the Nifty added 1.5%.
- The mood turned later in the day as talks in Ukraine ended with no indications that a cessation of hostilities was imminent. In Europe the FTSE 100 dropped -1.3%, the CAC -2.8% and the DAX -2.9%. There were losses in the US also as the Dow Jones, the S&P 500 and the NASDAQ dropped -0.3%, -0.4% and -1.0% respectively.
- Local markets were mixed. The ADX gained -0.9% but the DFM (-0.1%) and the Tadawul (-0.4%) both closed down.
Commodities
- Oil prices extended their recent losses with Brent futures down 1.6% at USD 109.33/b and WTI off by 2.5% to USD 106.02/b as markets look for any sign of optimism in the war in Ukraine. The volatility persisted in other energy markets as well, with natural gas prices falling also.
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