Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 11/03/24

ECB is more confident of inflation returning to the target

The ECB stood pat on March 7th (DFR: +4.0% | MRO: +4.5%), as expected. The outlook for inflation was revised down. Indeed, headline CPI projections moved lower by -0.4 pps in 2024 to +2.3%, by -0.1 pp to +2.0% in 2024 and were left unchanged for 2026 at +1.9% (on average). Core CPI projections were revised down as well. 

In addition, President Lagarde highlighted that officials are more confident that inflation will eventually revert to the target of 2%, suggesting that the commencement of interest rate cuts is coming closer.

Market expectations, according to overnight index swaps, are in tandem with the first rate cut coming in June, while pricing in cumulative cuts of -100 bps by end-2024 compared with -85 bps prior to the meeting and -145 bps in early January. Expectations have converged better with officials’ views.

Government bond yields declined modestly post-ECB, with German 10-year Bund yield down by -14 bps week-over-week, to 2.27% and periphery bond spread spreads narrowing in Italy by -17 bps to 131 bps and in Greece by -12 bps to 92 bps ahead of the DBRS Morningstar announcement. The latter maintained the Hellenic Republic’s credit rating at BBB (low) with stable outlook.

Attention now turns to the respective rating from Moody’s, due on March 15th. Current rating is Ba1, one notch below investment grade. Moody’s is the sole from the most prominent rating agencies (Fitch, S&P), still assigning below investment-grade status to the Hellenic Republic, with a potential upgrade leaving room for additional long-term investment inflows.

Government bond yields retreated on the other side of the Atlantic as well (US 10-Year Treasury yield declined by -9 bps to 4.09%), as Chair Powell, during the semiannual monetary policy report to the US Congress, broadly reiterated that cuts in the Federal Funds Rate are very likely to come in the course of 2024 and noted that the Fed is not “far from it”.

The US labor market report for February had mixed takeaways for monetary policy prospects, with non-farm payrolls increasing by 275k, albeit with -167k downward revisions in the past month (see Economics). Attention now turns to the US CPI report for February, due on March 12th (NBG estimates: +3.1% yoy for a 2nd consecutive month).

In the UK, the Spring Budget had modest and mutually offsetting (in terms of cost) measures. Modest consolidation remains the central narrative, with public sector net borrowing projected at -3.1% of GDP in fiscal year 2024-2025 from -4.2% in 2023-24. The public sector net debt is projected to peak at 93% of GDP in 2026-27 from 85% in 2022-23.

At the same time, UK economic projections by the Office for Budget Responsibility (OBR) were broadly unchanged compared with November 2023. The OBR foresees improving real GDP growth in 2024 (+0.8% from +0.1% in 2023), as real household incomes recover and financial costs ease. Moreover, CPI inflation is projected to ease to +2.2% in 2024 (on average) from +4.0% in January 2024 and from +7.3% in 2023 and to +1.5% in 2025. All told, 10-Year UK Gilts declined by 13 bps to 4.06% in the past week, in tandem with other core bond markets.