Sunset Market Commentary

Markets

The US 30-yr yield today broke key resistance at 5.15%/5.17% (respective tops of 2025 and 2023) to currently trade at the highest level since 2007. The 5.5% area is the next technical reference on the chart. It’s where the top levels of 2003, 2004 and 2007 all collide. The US 10-yr yield moves past the May2025 top at 4.62% with the 2025 top (4.81%) and 2023 (5.02%) tops being the remainder hurdles before joining the 30-yr yield to highest levels since 2007. This set-up immediately presents Kevin Warsh with a formidable challenge after he’s sworn in as next Fed chair on Friday. In the past, Warsh has consistently been critical on the (size of the) Fed’s balance sheet. He repeatedly argued to shrink it further, enabling a return to short-term interest rates as the central bank’s prime tool. He believes that the Fed played an outsized role via its asset purchases and argues for a much smaller (market) footprint. Question is of course how feasible these ideas are at current interest rate levels and with the US government running budget deficits to the tune of 8% of GDP. Warsh will have to walk a tightrope balancing what will probably still be his structural view without discomforting markets when it comes to size or speed for any such potential execution of his plans. Simultaneously, inflation risks stemming from the ongoing stalemate between the US and Iran are throwing a spanner in his preference to complement a tighter liquidity policy with a looser interest rate stance. The US 2-yr yield holds firmly above 4% as markets err on the side of a rate hike rather than a rate cut as the Fed’s next move, with recent eco data and labour market proving solid. A sticky oil price is the needle in the compass. Brent crude trades around $110/b with markets less willing to anticipate any breakthrough. The lacklustre reaction to yesterday’s (US) announcement that an imminent attack against Iran (today) has been postponed serves as a point in case. With commercial oil reserves depleting at stealth pace, the clock is ticking towards a significant binary risk. It’s unclear when the alarm goes off. Depending on the source/analyst, it could come as soon as end May/early June. A new upleg beyond the $120/b-top without roadmap to a reopening of Hormuz or a return towards the $100/b in anticipation of final agreements? Time will tell. Renewed pressure on US Treasuries today hurts risk sentiment again with key US indices losing more than 0.5% at the start of dealings. They might be exposed to a more pronounced correction once earnings/AI-support falters after Nvidia earnings. The US dollar gains the upper hand on FX markets in this bearish market with EUR/USD testing 1.16 for the first time since the start of the initial cease-fire between the US and Iran.

News & Views

The Brazilian real opened a tad weaker today with USD/BRL bouncing back above the 5 barrier. It followed an election poll that showed president Lula da Silva reclaiming the lead over Bolsonaro with 49% against 42%. Bolsonaro’s momentum grew shortly after his December announcement that he would challenge Lula in the October 4 presidential elections, putting him virtually on par in with the incumbent president ever since. A recent banking fraud scandal however has weighed on Bolsonaro’s popularity and that’s now beginning to show up in the polls. Former-president Bolsonaro for financial markets is the preferred pick over Lula, which is seen wavering on fiscal discipline through, amongst others, a series of stimulative measures taken in recent weeks.

Canadian April inflation came in at the low end of expectations. The headline number printed 0.4% m/m vs 0.7% expected and down from the 0.9% seen in March. The annual figure still quickened from 2.4% to a two-year high of 2.8% but remained below the 3.1% bar. Core gauges at 2% (trimmed) and 2.1% (median) similarly undershot the 2.2% and 2.3% consensus view. Energy prices rose a sharp 5.7% m/m, down from March’s 13.1% as the Middle East impact continues to linger. The annual reading was further amplified through base effects (the removal of a carbon levy in April 2025), lifting it to 19.2%. Fuel oil and other fuels shot up 41.3% y/y, Statistics Canada said. Inflation stagnated when excluding energy on a monthly basis to be up 1.8% year-over-year. Stripping out food prices on top of that leaves CPI at 1.5%, the slowest since March 2021. Services inflation meanwhile fell by 0.3% m/m to 1.7% y/y. Canadian swap yields drop up to 3.5 bps at the front end of the curve with Canadian money markets pushing back slightly on central bank tightening bets. The Loonie loses ground to USD/CAD 1.376, matching mid-April levels.