Markets

US bond yields slid further in moves that greatly outpace those in Germany. Declines vary between -5.7 and 7.5 bps with some minor outperformance by the belly of the curve. Rates showed signs of fatigue by mid-February. At that time markets were priced for growth perfection with elevated inflation embraced as the necessary byproduct. Such a stretch was only tenable in case of near-perfect data. Enter Friday’s US PMIs. Inflation fears swapped for a growth scare and pushes the US 2-yr yield towards first support at 4.06-4.09% – the 38.2% retracement on the Sep-Jan rally and lower bound of the sideways trading range in place since November last year. The 10-yr tenor moves to new YtD lows at 4.31% today and breaks below the 38.2% retracement (4.34%) of that same Sep-Jan rally in the process. Moves in Germany are limited to 2 bps. The front end of the curve is more or less locked in to the downside with the bar to add to the current amount of expected ECB easing getting higher by the day. ECB’s Nagel, Kazaks and Schnabel all showcased that by calling either for caution when cutting rates further or saying that rates below neutral are not a discussion for now. Today’s euro area negotiated wage index underscored their view. Wage growth slowed from Q3’s record 5.4% in Q3 but the pace remains at a high 4.1%. The ECB’s own tracker a few weeks ago suggested wages would continue to grow fast at least through the first half of this year. Longer-term yields are better protected now Europe’s largest economy, Germany, is on the verge of loosening the fiscal reins, in first instance to increase its military capacity but later perhaps to jumpstart broader business and consumption. Bloomberg reported that the upcoming chancellor Merz of the winning CDU/CSU party is in talks with the SPD to change the constitution to create a special €200bn fund. The aim is to do so ahead of the new legislature (March 24) in which the far right and left have blocking minorities. The SPD indicated they are open to do so as well as to adjust the debt brake that’s limiting the amount of annual borrowing to just 0.35% of GDP. Sticking to the subject, UK PM Starmer today outlined plans to increase defense spending from 2.3% to 3% of GDP over the next decade. He added that it would be funded through spending cuts rather than higher taxes or borrowing. In a first step he wants to raise it to 2.5% by 2027, from 2.3% currently. This amounts to around £5bn. UK yields (-6 bps)are caught in the broader downtrend though. Currency markets are relatively calm. The dollar trades with a slight negative bias. EUR/USD rises to 1.05, the trade-weighted DXY returned to the recent lows around the 38.2% support of the Sep-Jan move higher at 106.35.

News & Views

UK retail sales volumes in February declined (Y/Y) for the fifth consecutive month according to the Confederation of British Industry’s (CBI) quarterly distributive trades survey. The weighted balance printed at -23. Retailers even expect sales to fall at a somewhat faster pace in March. ‘Retailers remain downbeat about their future business situation, and this sentiment was reflected in their expectations to cut back on headcount and capital expenditure going forward. In particular, investment intentions worsened to the greatest extent since May 2019.’, CBI said. Sales for the time of year are judged to be “poor” and firms expect their business to deteriorate over the coming quarter (-19) too. Retailers especially expect to reduce investment in the next 12 months. Headcount in retail declined at a moderate pace and is anticipated to fall at a broadly similar rate in March. CBI blames persistently weak demand and the impact of the Autumn budget to have dampened sentiment and urges the government to take measures.

Brazilian consumer prices in Brazil accelerated sharply from 0.11% M/M and 4.50% Y/Y in January to 1.23% M/M and 4.96% Y/Y in February, the highest level since October 2023. The M/M rise was the highest since April 2022 and even the fastest pace for the month February since 2016. According to IBGE statistical agency, the jump in inflation was mainly due to housing related costs and education. While at elevated levels, the market consensus still expected an even slightly faster rise (5%+ Y/Y). The central bank targets inflation at 3.0% with a deviation of +/- 1.5ppt. The Banco do Brazil resumed its tightening cycle in September of last year and in January for the second consecutive meeting raised its policy rate by 100 bps to 13.25%. The slightly softer than expected February reading won’t change the banks intention the raise the policy rate again by 100 bps at the March meeting as its seeks to reign in an de-anchoring of inflation expectations. The real trades marginally softer against the dollar today (USD/BRL 5.784).