Markets
Markets yesterday embraced weekend comments by US president Trump suggesting that the US and Iran were close to completing an agreement. They found more comfort in messages that Iran’s parliamentary speaker and foreign minister were travelling to Qatar yesterday to try to reach a deal which would extend the ceasefire by two months and reopen Hormuz. Brent crude prices dropped from closing levels last week around $104/b to opening levels of $98 on Monday. After that initial move, they stabilized. As we’ve seen more since the start of the war, the US media campaign didn’t resonate through official Iranian comments with the foreign ministry’s spokesperson warning that the signing of an agreement isn’t imminent despite recent progress. There are also new reported US attacks against Iranian missile launch sites and boats this morning which threaten to derail/delay negotiations.
Bond futures opened stronger and managed to add some momentum intraday. We wait to draw firm conclusions as trading was thinned by public holidays in the US (Memorial Day), the UK (Spring Bank Holiday) and several European countries (Whit Monday). US stock markets were closed, but the EuroStoxx50 rallied 2% to its highest level since the start of the war in the Middle East. EUR/USD started with a move from 1.16 to 1.1650 but treaded water afterwards.
Apart from Iran-related headlines, today’s eco calendar is thin with US consumer confidence and a $69bn 2-yr Note auction. Comments by central bankers remain interesting. ECB Schnabel told Reuters this morning that the ECB should hike its policy rate in June even if there’s a peace deal. She believes that looking through the supply shock is no longer an option, arguing that it is already beyond the central bank’s adverse scenario in terms of persistence. Increasing sings of spillovers leave the ECB no other option. She joins calls by colleagues Kazimir, Kocher, Wunsch and Muller who suggested that a June rate hike would be the default option. Over the weekend, ECB President Lagarde also suggested that March inflation projections were likely to be revised upward at the June 11 policy meeting. Later today, ECB Sleijpen is scheduled to speak. From the US Fed, we retain Friday evening’s comments by heavyweight Fed governor Waller. He supports removing the easing bias language in the policy statement to make it clear that a rate cut is no more likely in the future than a rate hike. Inflation is not headed in the right direction and Waller doesn’t want to rule out raising rates if price pressures doesn’t abate soon.
News & Views
Czech economic confidence declined further in May (101.3 to 99.7). Both business confidence (100.4 to 99) and consumer confidence (106 to 103.4) suffered a setback. The former only showed sentiment in the construction sector (+ 2.4 points) improving while decreasing in the industry (-2.6 points), trade (-2.2 points) and selected services (-0.5 points) sectors. Regarding consumer confidence, the proportion of respondents assessing their current financial situation as worse than in the previous twelve months increased, while the share of households expecting an improvement in their financial situation decreased slightly. Still the share of consumers expecting a deterioration in the overall economic situation in Czechia over the next twelve months remained almost unchanged. Separately from the data, Czech Prime Minister Babis called the Czech National Bank to lower its policy rate as he is of the view that there is no reason for Czech citizens to pay a higher interest rate than in the EMU. The CNB in May left its policy rate unchanged at 3.5% and Governor Mich indicated that a moderately restrictive policy is needed. He couldn’t rule out rate hikes if necessary to prevent a rise in (core) inflation.
Polish Finance Minister Domanski yesterday said that there is no political support in Poland to join the euro anytime soon. He assessed having an independent currency as still being beneficial to the Polish economy. The comments probably have to be put in the context of political developments in Hungary where the new government has engaged in a process that should enable the country to meet the requirements for joining the single currency as soon as possible.
