European Equity Indices Run Into Headwinds, Spanish And German Inflation Surges

 | Mar 30, 2022 10:55

Quote of the day: “The Fed’s application of its framework has left it behind the curve in controlling inflation. This, in turn, has made a hard landing virtually inevitable" - former NY Fed President Dudley. 

The yield on the 2yr Treasury bond briefly rose above the yield for 10yr paper....that’s the big inversion everyone has been waiting for. So now it’s happened, can we look at the curve steepening again? That might be good for risk, although it could imply higher terminal rate...it can probably steepen a bit from these levels but I wouldn’t be too confident. Anyway, an inverted yield curve of this sort is usually a pretty good recession indicator for the US; in 50 years it’s never missed. Typically, it takes about 18 months to come good. Last time, in August 2019, I guess it got lucky as Covid came around the corner...what could be different this time? The Fed’s Harker is technically right to point out it’s correlated with recessions, rather than a causal factor...but that somewhat misses the point. It’s an indicator and it’s a good one. The 5s30s curve inverted earlier this week for the first time since 2006. 

We saw Eurozone money markets all over the place yesterday, starting to price for more tightening this year by the ECB and then reversing...ECB’s Holzmann says lifting interest rates to zero by 2022 is critical for ECB policy. Chief economist Lane says the inflation is imported shock, will fade away...will they never learn? German inflation today is expected to rise from 5.1% in Feb to 6.3% in March...but the early stats from the industrial region of North Rhine Westphalia shot to 7.6% from 5.3% so we could see the national reading higher than forecast. Spain’s CPI inflation jumped to 9.8% in March! European bonds are on the move again off the back of these readings this morning with shorter dated paper selling off fast. German 2yr yields rose about 9bps to 0.04%, with the 10yr Bund moving close to 0.7% again after briefly rising above this level yesterday.

FX 

The euro caught some bid as yields moved around...hopes for Ukraine peace deal perhaps given the euro has been a good proxy for the impact of the war. Largely EUR/USD has held gains with the cross above 1.11 this morning, holding close to the mid-March swing high, eyeing near-term resistance at the 23.6% retracement of the Jan-Mar decline at 1.1170. MACD still supportive.