Markets on Friday backtracked on the benign environment of softer yields and a weaker dollar that reigned most of last week. Inflation roared back into spotlight. Chinese CPI and PPI were stronger than expected. This narrative was solidified as US PPI jumped 1.0% M/M and 4.2% Y/Y, with core measures also printing above consensus. End of week profit taking probably was also in play. US Treasury yields closed higher between 0.6bp (2-y) over 2.25 bp (30-y). The belly of the curve underperformed with 5/10’s rising 2.75bp/3.9 bp. The German yield curve followed the broader trend with yields rising up to 3.3 bp (10-y) and 3.5bp (5-y). The rise in yields had little negative impact on equities with the Dow and the S&P still close at record levels. The dollar also bottomed after last week’s correction, but gains remained modest. DXY index closed marginally higher at 92.16. EUR/USD finished the week near the 1.19 big figure. USD/JPY (109.67) also set a step north but failed to regain the 110 barrier. Sterling remained in the defensive, even as the UK is preparing to further ease lockdown measures. EUR/GBP even closed slightly stronger at 0.8683.
This morning, sentiment on Asian markets turns cautions,with China underperforming. Fed President Powell in an interview this weekend sounded constructive on the US economic recovery, but this isn’t visible (yet) in markets’ positioning. US Treasury yields are little changed. The dollar tries to extend Friday’s rebound with the DXY at 92.30. USD/JPY is trading little changed as the risk-off slightly supports the yen. EUR/USD eases to the 1.1885 area.
The eco calendar is thin today. The focus is on a $ 58bln sale of 3-y Treasuries and a $38 bln sales of 10-y bonds. After last week’s bond rally, some price concession might be needed. Tomorrow, US CPI (headline expected to jump from 1.7% to 2.5%) is due and the US Treasury will sell 30-y bonds. Further out the eco calendar is backload with US retail sales, jobless claims and production data on Thursday and consumer confidence and the first estimate of China Q1 GDP to be released on Friday. Fr om mid this week, the (US) earnings season will kick off. US Treasuries show resilience due to the risk-off this morning, but with inflation and Treasury auctions on the radar, core yields might continue Friday’s tentative bottoming process. The US 10-y yields might return higher in the 1.60%/1.77% ST consolidation pattern. This might also be a more fertile context for the dollar. The EUR/USD 1.1927/90 area looks like a tough resistance. At the same time, the vaccination narrative gradually might turn more EMU/euro constructive, causing a USD-driven EUR/USD setback to develop slower than was the case late last month. EUR/GBP currently quite easily maintains last week’s gain. Good news apparently is largely priced in for the UK currency. A gain north of 0.8731 is needed to improve the technical picture.
German CSU leader and PM of Bavaria Söder, deems himself fit to take a run at the Chancellorship as the joint CDU/CSU candidate at the September 26 federal election. Söder breaks with tradition that the CDU leader normally gets the near “automatic” right to be the bloc’s candidate. The CDU recently slumped in the polls as initial support over handling the Covid-crisis fades (slow vaccination pace; fraud with face masks) while newly installed leader Laschet suffers from low approval ratings. Laschet and Söder are expected to sort the issue out the latest by the end of May, but probably much sooner.
Czech central bank governor Rusnok said that it would be “no tragedy” should Czech inflation rise above the Czech National Bank’s 2% (+- 1 percentage point) target this year. Looking through temporary higher inflation might come somewhat as a surprise from the traditionally orthodox central bank, but Rusnok nuances: “If our forecasts were to show that there is some longer-term trend, that it is not just a swing of these commodities, then we would of course have to adjust our policy and start considering a gradual return to interest rates that are more normal than what we have at the moment.” EUR/CZK trades currently back above the 26 big figure.