In a session devoid of significant data in the United States and Europe, apart from other headlines on the development of the Russian-Ukrainian conflict, investors could take a closer look at the consequences of the ECB finally returning to its core business: managing inflation. Comments from ECB members Villeroy and Rehn reiterated that “obtaining optionality” was an important consideration for yesterday’s ECB decision to reduce the APP faster than expected and at the same time indicate that rates could be raised “some time after” the end of the APP. At least today, the markets are still tending to conclude that the risks of upside inflation will rather lead to an “option” swinging towards normalization rather quickly and perhaps also longer than expected until recently. The swap market technical chart suggests that the EMU interest rate market is entering a new era. The 2-year swap (0.29%) broke above the key resistance of 0.25%. Going up 0.35% (August 2014 high) would confirm the view that the EMU era of negative interest rates should definitely come to an end. The 10-year swap is also again attacking the symbolic benchmark of 1.0%. Today’s uptrend in yields was complemented by a resumption of the rebound in risk. Markets were somewhat more reassured by headlines (around noon) that the Russian President saw “positive developments” in the talks with Ukraine. Although the comments contained few details, European stock markets surged higher, with some indexes gaining as much as 3%. US markets opened with gains of 0.5% to 1.0%. The easing of safe supply and post-ECB repositioning is (modestly) driving German yields up to 3.5bps for 5y (this was more intraday). Intra-EMU spreads reverse some (limited) part of yesterday’s widening (10-year Italian spread vs Germany -5 bps). US rates increase between 3.5 basis points (2 years) and 1.5 basis points (30 years). Relative calm is also returning to (parts of) the commodities market, with Brent oil “stabilizing” near $109 a barrel.

FX markets have also reached some sort of ST equilibrium with EUR/USD hovering near the 1.10 (1.099) pivot. DXY is hovering around 98.50. The USD/JPY cross rate is a notable exception. The yen hasn’t benefited much from the Ukraine uncertainty recently. Today, the combination of better sentiment and higher basis yields is still reason enough to trigger further yen losses with USD/JPY testing the 117 barrier for the first time since early 2017. EUR/GBP is holding close to the big figure of 0.84. The pound is not benefiting from decent January output data supporting the case for further BoE tightening next week. Among the small coins, the swedish crown this week managed a comeback after being caught in an extended downtrend (EUR/SEK uptrend) since mid-January. Risk-on the main part of this story. Or will the ECB’s U-turn gradually influence the Riksbank’s thinking? EUR/SEK is currently trading near 10.64, down from a peak near 10.90 at the start of the week.

News headlines

The Canadian labor market had an exceptional month in February. Employment growth more than recovered from Omicron’s decline in January, standing at 336.6k vs 127.5k expected. The unemployment rate fell one percentage point to 5.5%. Unemployment has only been lower once in the series’ history (May 2019, 5.4%). The sharp drop came even as the the participation rate reached a higher than expected level of 65.4%. Data solidifies the market expectations of (more than) 6 more rate hikes by the Bank of Canada this year. The Bank of Canada kicked off the normalization cycle earlier this month with an initial rate hike of 0.5% and hasn’t ruled out a half-point move in the future. It will probably be completed by a passive roll-off of the balance sheet from April. The gains of the Canadian dollar against the euro and the dollar are limited. USD/CAD drops from 1.277 to 1.272, EUR/CAD tests the big figure of 1.40.

Argentina’s parliament has approved a bill that backs the government’s $45 billion debt restructuring deal with the IMF, avoiding a March 22 default (payment of $2.8 billion). The initial support package only dates back to 2018 ($57 billion bailout). Debt repayments will now be postponed until 2026 in exchange for a government commitment to reduce the budget deficit over three years and curb central bank money printing. In particular, subsidies on electricity and gas will be considerably reduced. The bill was passed by Argentina’s lower house with the support of the opposition (202 votes out of 257) after the government dropped a clause stipulating that congress would support the government’s economic policy.