CZECHIA: Staff Flag US Policy As Key Source Of Uncertainty
The CNB discusses its new macroeconomic forecast during the ongoing meeting with analysts, confirms that the balance of risks to the baseline scenario is slightly inflationary. The key source of uncertainty are the policies of the new US administration. Staff also discuss a scenario analysis conducted while preparing the updated forecast.
- The first scenario assumes higher services and food prices and implies that CPI inflation would be 0.5pp higher at the end of this year, resulting in a slowed reduction in interest rates.
- The second scenario assumes higher domestic inflation and an economic downturn in the eurozone, which would have stagflationary implications for Czechia, resulting in a steeper (initially more hawkish, then more dovish) interest-rate path.
Fig. 1: Risks and Uncertainties in the CNB's New Macroeconomic Forecast
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EQUITIES: EU Bank put spread
SX7E (21st Mar) 145/135ps, bought for 2 in 6k.
BONDS: Off Lows, Supply Caps Recovery, Bearish Techs Intact
A narrow session for core global FI markets, with TY, Bund & gilt futures all trading above yesterday’s lows.
- Continued heavy IG supply limits any recoveries at this stage.
- The initial EGB syndications of ’25 have generated strong demand.
- Little reaction to fresh multi-month highs in crude futures.
- Bearish technicals intact.
- Bund futures flat around 132.00, German yields -0.5bp to +0.5bp, light steepening.
- EGB spreads to Bunds -2bp to +0.5bp.
- European equity rally promotes some outperformance for the likes of GGBs and BTPs.
- GGBs continue early ’25 outperformance, aided by fiscal/ratings trajectory and the PDMA’s conservative ’25 issuance target. Spread to Bunds further below 75bp, on track for another cycle closing low.
- BTPs have tightened by ~1.5bp vs. Bunds, aided by solid demand at today’s syndication (orderbooks have hit a record level for a dual tranche offering). Spread to Bunds nearing 110bp, a level not closed below since December 11.
- PGBs the laggard this morning, perhaps driven by expectations for a PGB syndication announcement.
- Gilts saw some light concession into this morning’s ’30 gilt auction, although have stabilised since, aided by solid enough demand (which was notable given the bearish backdrop).
- Futures last little changed at ~91.40. Yields little changed across the curve.
- ECB & BoE pricing little changed on the day, showing 102bp and 55.5bp of cuts through ’25, respectively.
- U.S. ADP employment and weekly jobless claims data due later.
- Comments from Fed’s Waller & ECB’s Villeroy also scheduled.
- Bund supply due shortly, with U.S. 30-Year supply on deck later.
DENMARK: Greenland PM To Meet w/King Following Trump Jr. Visit
Greenlandic Prime Minister Múte Egede will meet with King Frederik X at 1400CET amid intense national and international political focus on the future of Greenland. The meeting was initially called off by Egede on the evening of 7 Jan citing 'calendar gymnastics' but was this morning reinstated at an earlier time. This followed the controversial visit of Donald Trump Jr. to the capital, Nuuk, on the same day.
- Speaking at a presser on 7 Jan, US President-elect Donald Trump when asked whether he would rule out using military or economic force to take control of Greenland (or indeed the Panama Canal) Trump responded "No, I can't assure you either of those two. But I can say this: we need them for economic security. We need Greenland for national security purposes."
- In response to Trump Jr.'s visit, Danish PM Mette Frederiksen, only months ago seen as a contender to be the next NATO secretary general, sought to downplay the likelihood of direct US-Danish conflict while also advocating for Greenland's right to choose its path.
- As well as sitting under the shortest aerial route between North America and Europe, Greenland has significant reserves of rare earth elements crucial in manufacturing high-tech equipment such as batteries and semiconductors. Given the prospect of an escalation in trade tensions between the US, Europe, and China in the coming months and years ensuring a stable supply chain for such REEs will be a key economic and military priority for Washington.
