FED: Powell: Economy Still Solid, Policy Moderately Restrictive
Powell in Q&A asked about recession possibility: "The incoming data, right through this morning's employment report, still shows a solid economy...I understand the uncertainty that's weighing on people. We don't make a probability forecast of how likely it is for a recession, but many outside forecasters do, and many of them have raised the likelihood, albeit from very low levels. It's not something that anybody now is forecasting or some people are starting to. So not much more I can say about that."
- Powell on how people can make plans amid government policy uncertainty - implying that it might take as much as a year to achieve certainty: "At a certain point, the new policies will be on the table. They will be having the effects they're going to have on the economy. And uncertainty will decline. Right now, there's a lot of uncertainty about where all that's going to sort out the forms it will take and what the economic effects will be. If you fast forward a year from now, the uncertainty should be much lower, the actual effects of the policies should then be pretty manifest and clear."
- Powell repeats that current policy is "moderately restrictive". "It's a good time to take a step back and let things clarify. That's why it's just too soon to say what the appropriate monetary policy response will be to these new policies. It is just too soon to say, we can't say with any confidence today. So that's what we're doing. We've taken a step back, and we're watching to see what the policies turn out to be and the ways in which they will affect the economy, and then, then we'll be able to act."
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EURIBOR: Net Long Setting Dominated On Tuesday
OI data suggests net long setting dominated in Euribor futures on Tuesday, with some pockets of net short cover also seen across the strip.
- The largest net OI swing was seen in the M5 contract, where ~37k of indicative net longs were added.
- Notable options flow in M5 yesterday included:
- ERM5 98.12/98.25cs, bought for half in 6k.
- ERM5 98.125/98.3125cs, bought for 1 in 29k.
| 04/03/2025 | 03/03/2025 | Daily OI Change | Daily OI Change In Packs | ||
| ERH5 | 539,589 | 537,809 | +1,780 | Whites | +35,800 |
| ERM5 | 810,021 | 773,004 | +37,017 | Reds | +1,561 |
| ERU5 | 574,236 | 578,312 | -4,076 | Greens | +6,054 |
| ERZ5 | 606,392 | 605,313 | +1,079 | Blues | +1,372 |
| ERH6 | 434,644 | 430,992 | +3,652 | ||
| ERM6 | 339,883 | 335,585 | +4,298 | ||
| ERU6 | 258,203 | 267,402 | -9,199 | ||
| ERZ6 | 345,641 | 342,831 | +2,810 | ||
| ERH7 | 178,807 | 179,200 | -393 | ||
| ERM7 | 145,074 | 146,915 | -1,841 | ||
| ERU7 | 121,997 | 119,235 | +2,762 | ||
| ERZ7 | 129,178 | 123,652 | +5,526 | ||
| ERH8 | 63,149 | 58,970 | +4,179 | ||
| ERM8 | 46,783 | 46,142 | +641 | ||
| ERU8 | 32,985 | 35,713 | -2,728 | ||
| ERZ8 | 45,640 | 46,360 | -720 |
SWEDEN: Feb CPIF Preview: SEK Most Sensitive To Weaker-than-Expected Reading
Swedish February flash inflation is due at 0700GMT/0800CET tomorrow. As always, there are no details provided in the flash release, so the market reaction will hinge solely on the headline CPIF and CPIF ex-energy readings. Given the extent of the Swedish krona’s rally since the start of February, the risks to markets are likely skewed towards a weaker-than-expected print.
- NOKSEK notably breached multi-year support at 0.9500 on Monday, with bearish momentum reasserting itself this morning. Key support is the November 2020 low at 0.9274, while rallies short of the 20-day EMA at 0.9585 will be considered corrective. Meanwhile, USDSEK is down almost 5% this week, with solid support seen around 10.1500 and 10.0399 (Sep 27 low).
- There are mechanical upside risks to the Riksbank’s 2.4% Y/Y projection for February CPIF ex-energy, after the January inflation report was much stronger than expected. Analysts currently expect CPIF ex-energy inflation steady at 2.7% Y/Y.
- The January beat was due to a positive basket effect and solid underlying price pressures. The basket effect will be positive throughout the year, while analysts also do not expect a meaningful reversal of the underlying January drivers. Taken alongside strong PPI and survey-based expected price metrics in the last month, scope for a move back towards 2% in the near future appears limited.
- The Riksbank are widely expected to keep rates on hold on March 20, but the February inflation report will feed into expectations for the March MPR rate path.
- Headline CPIF is expected to increase 0.5pp to 2.7% Y/Y on the back of higher electricity prices (partially due to a base effect).
- See the image below for a selection of analyst comments:
EUROPEAN INFLATION: 5y5y Swaps Higher On Fiscal; Energy Channel Dominated
The prospect of a significant increase in German fiscal spending is quite clearly the driver of EUR inflation swaps this week, which have rallied sharply despite lower Brent (-2.5%) and natural gas futures prices (-3.6%) today. The 5y5y inflation swap has spiked 14.1bps on the session to 2.21%, the highest level since October 15th 2024.
- 1- and 2-year swaps have seen slightly more modest increases (+8.3bps and +8.6bps respectively), with the primary growth impulse from higher defence and infrastructure spending likely to be realised with a lag of several years.
- Ultimately, the inflationary impact of higher spending will depend on its uses. While fiscal multipliers would likely prompt a degree of demand-driven inflationary pressure, the net impact may be blunted if spending is directed towards the supply side e.g. improving Europe/Germany’s productive capacity in defence.
