Markets
EMU and to a lesser extent US PMI’s confirmed the feared-for stagflationary tendencies as the fall-out of the conflict in the Middle East unsettles multiple supply chains and triggers a mutually reinforcing spiral of upward cost translating into higher prices for end users. In the EMU this resulted in prospects/a risk of an outright contraction in activity .S&P sees the 47.5 composite PMI reading as indicating a potential Q2 growth contraction of 0.2%. The sharp decline in the services sector (46.4) couldn’t be compensated for by a (slowing) rise in manufacturing activity (output 51) due to precautionary buying ahead of feared for supply issues and higher prices. Price gauges in the meantime suggest EMU inflation potentially heading toward 4% in the coming months. The picture in the US was less negative than in Europe. Even so, a composite PMI at 51.7 also only suggests modest, decelerating growth. US services moved to sluggish growth (50.9), while an uptick in manufacturing activity (55.3) due to precautionary buying won’t last forever. S&P sees the May PMI’s as evidence of the economy struggling to keep an annualized growth pace of 1% in a context of further rising prices. As is often the case, the direct impact of the indicators on yields was limited. Even so, they continue to illustrate ongoing pressure on central banks to avoid a new 2022. Of course, in the meantime, political headlines on the progress in reaching an agreement in the US-Iran conflict still had the last word in the daily market narrative. Headlines from both sides were some kind tentatively positive (at least some Iran sources mentioned some ‘narrowing of the gap’). Even so, we didn’t see any hard progress on the key topics including the Iran nuclear program. Headlines on Iran and Oman considering a permanent toll for passing the Strait of Hormuz also don’t help. Brent oil price eased marginally ($102.5). US and EMU yields basically stabilized at elevated levels. In a flattening move, US yields changed between + 2.8 bps and -3.1 bp. German yields in a similar move changed between 3 bps and -0.7 bps. EMU and US equities took a wait-and-see stance (S&P 500 +0.17%; Eurostoxx 50 -0.26%). In major FX, low volatility trading continued with DXY holding near 99.25, EUR/USD closing at 1.162 and USD/JPY capped near 159.
Asian markets this morning again give a mixed picture. Regional equity indices show decent gains across the board. At the same time, a (small) rebound in the oil price (Brent $104.75) still suggests underlying caution on the Iran conflict going into the weekend. The eco calendar is modestly interesting. We keep an eye at the ECB negotiated wages indictor and German IFO business confidence, but they are no gamechangers. Interesting to see whether ECB’s Lagarde provides some clarifications on the ECB’s reaction function as she attends a Eurogroup meeting. UK data published this morning show weak April retail (-1.3% M/ and 0.0% Y/Y) and higher than expected April public sector borrowing. At EUR/GBP 0.865, sterling doesn’t show a clear directional reaction.
News & Views
Favourable base effects from last year’s food price spike combined with cheaper school lunches and government subsidies that capped gasoline prices have resulted in lower (than expected) Japanese inflation last month. Headline CPI retreated from 1.5% to 1.4%. Underlying gauges also decelerated from 1.8% to 1.4% (ex. fresh food) and from 2.4% to 1.9% (ex. fresh food and energy). Services inflation eased as well to the first sub 1% reading since December 2022. There’s reason for the central bank to be cautious in interpreting the numbers with so many (policy and technical) variables clouding its meaning. Energy prices following the Iran war are expected to trigger a fresh wave of broader inflation as it ripples through the economy. Meanwhile, some particular rising price pressures are suggesting that momentum remains firm. Inflation in public services for example is accelerating, a sector in which firms are typically wary to pass on higher costs to consumers. Japanese front end yields lose less than 2 bps, be it in a global move rather than reacting on the CPI. USD/JPY is stabilizing near this week’s highs around 159.
British GfK consumer confidence unexpectedly slightly recovered from April’s 2.5 year low of -25 to -23 in May. That’s still well below the long-running average of -11 though. Improving categories included households’ view on personal finances the next 12 months (from -4 to -2) and on the economy the year ahead (from -43 to -38). British consumers consider the climate to do major purchases to have worsened from -18 to -20, a new 1.5 year low. Saving intentions tumbled from post GFC-highs (32) to 22.
