Last week, US and European interest rate markets developed rather independently. US yields eased despite a series of strong price and activity data. European interest rates (and the euro) staged a catch-up move as investors saw improvement in the European vaccination process, supporting the prospect of a gradual reopening. Today, these divergent trends between US and EMU interest rate markets were arrested by a broader risk-off correction on global equity markets. After touching cycle (Europe) or even all time (US, Dow, S&P) top levels several days in a row, equity sentiment turned more cautious. European indices are losing about 1.5% on average. US indices are opening with losses of about 0.25%, continuing yesterday’s setback. The move was both due to sector specific issues (tobacco, travel) but also on broader profit taking. The risk-off repositioning blocked a tentative rise in core (US and European) yields this morning. Still, ‘safe haven’ bond gains are negligible. US and German yields both are declining less than 1 bp across the curve. Regarding the data, German PPI inflation printed higher than expected at 0.9% M/M and 3.7% Y/Y, but with no noticeable impact on yields. Technical considerations still were also in play. Especially European yields nearing key resistances levels (EMU 10-y swap 0.11% top, German 10-y yield -0.20%/-0.14% previous top levels) going into the ECB meeting maybe also capped the upside momentum. Oil resisted the risk-off correction as supply concerns from Libya counterbalanced global sentiment (Brent $ 67.50 P/b).
On the FX market, the dollar only enjoyed a very limited risk-off bid intraday. The trade-weighted index reversed an earlier loss and is trading marginally stronger in the 91.15 area. EUR/USD shows a similar picture, testing the 1.2075/80 area early in European dealings but returning to the 1.2045 area at the momentum of writing. Even so, today’s price action suggests that a return below 1.20 won’t be evident without euro negative news. Despite recent yen strength, the Japanese currency today also failed to capitalize on its safe haven characteristics. USD/JPY even rebounded from the 108 area to currently 108.50. Sterling retains most of yesterday’s gains against the dollar (cable 1.3960) and the euro (EUR/GBP 0.8627) despite mixed UK labour market data this morning. For now, the risk-off also had very limited impact on smaller currencies ranging from the CE currencies (forint, zloty and Czech krona) or the Norwegian/Swedish krone. EUR/CHF also stayed above the 1.10 barrier. Currency investors apparently don’t expected today’s correction to change the established trends.
The ECB’s quarterly lending survey showed that banks expect to tighten access to credit for firms further in Q2. The central bank added that it reflects banks’ uncertainty regarding the severity of the economic impact of the third wave of the pandemic and the progress in the vaccination campaign. Loan demand was also waning with firms postponing investments as several live on government support. Credit standards for housing loans will more than reverse the slight easing seen in Q1 even as net demand for mortgages rises.
Czech producer prices accelerated by 1.4% M/M and 3.3% Y/Y in March. The yearly pace is the fastest in 22 months and easily beating consensus (2.6% Y/Y). Details showed a broad-based gain as agricultural producer prices went by 0.4% Y/Y, prices of industrial producers increased by 3.3% Y/Y, construction work prices added 1.9% Y/Y and services producer prices 0.7% Y/Y. PPI numbers give more evidence of inflation pressure building with CPI also accelerating away from the 2% mark in March (2.3% Y/Y). EUR/CZK didn’t react to the numbers, trading flat just below 26.