Markets
After a week with few EMU and US data, EMU PMI’s provided a reality check on how the economy weathers the new corona wave, annex new containment measures. The PMI’s provided comfort. The EMU composite PMI even improved further from 53.2 to 53.7. Growth in the manufacturing sector (63.3) proceeds at a unsurpassed pace for the survey history, but also services (50.3 from 49.6) returns to growth (first time since August). The odds for future growth also look promising with sentiment improving, orderbooks and the backlog of work building. Better prospects also result in buoyant job growth in the manufacturing, but also the services sector added jobs. Accelerating activity and mounting supply side bottlenecks caused a sharp rise in input costs (sharpest rate for 10 years), primarily in manufacturing, but also for services. These higher costs are ever more passed through to customers, highlighting building inflationary risks. To conclude: the EMU economy shows solid resilience to the flaring up of the pandemic. Markets reacted only modestly to this hopeful message. A tentative rise in German yields already reversed before it even started. The German yield curve flattens slightly, with yields declining up to 1 bp (10-y). 10-y Intra-EMU spreads versus Germany widened marginally (Italy +2bp). European equities also failed to stay in positive territory and drifted south throughout the session (losses varying between 0.5%/1.0%). US (equity) markets are still looking for direction after the volatility/setback caused yesterday as president Biden revealed its intentions to raise capital gains taxes. US indices open little changed to marginally higher (Nasdaq +0.4%). US yields showed tentative signs of bottoming, but the jury is still out. US bonds remain resilient after recent rally. Yields are rising modestly (2 bp for 5-10-30y) as sentiment on risk remains fragile. US PMI also printed strong (manufacturing 60.6/ services 63.1).
The EMU PMI narrative had little (positive) impact on yields and equities, but EUR/USD was better inspired. Underlying USD softness was still in play, but the PMI’s also were a good enough reason for EUR/USD to leave the 1.20 area behind. The pair initially settled in the 1.2050/60 area, but additional USD selling at the start of US dealings brought the pair within reach of the 1.2080/90 resistance area (currently 1.2070). The trade-weighted dollar (DXY 90.92) also returned close the lowest level for the week. USD/JPY is accelerating losses below the 108 reference (currently 107.50). Contrary to the euro, sterling again didn’t profit from strong data. UK March retail sales this morning printed at an impressive 5.4% M/M and 7.2% Y/Y. The UK PMI’s (composite 60, manufact. 60.7 and services 60.1) all beat the consensus indicating accelerating growth. Still sterling was unmoved. EUR/GBP (0.8695) is even trending north, but gains again met strong resistance at the 0.87 level.
News Headlines
The Russian central bank hiked rates more than expected from 4.5% to 5%. It will “consider the necessity for further increases at its upcoming meetings”. A projected path for interest rates, published for the first time, sees the average key rate 4.8-5.4% in 2021, 5.3-6.3% in 2022 and 5-6% in 2023. The central bank kicked off a hiking cycle in March with a 25 bps rate increase to stem a surprise spike in inflation (expectations) as demand recovered, oil prices rose and the ruble weakened. The reasoning back then still holds today. The central bank kept their growth forecast at 3-4% but raised the end-of-year inflation projection to 4.7-5.2%, still above the 4% target. Ruble gains vs. the euro (EUR/RUB 90.33) and dollar (USD/RUB 74.86) are limited.
The Turkish lira extends its rapid descent beyond EUR/TRY 10. At 10.11, the currency trades at the record lows seen in November last year just before now-former CBRT governor Agbal took office. Turkish president Erdogan earlier this week defended the use of FX reserves to prop up the lira in 2019 and 2020. His comments added to market’s conviction that the CBRT under the new governor will use similar tactics rather than hike rates. Additionally, the Biden administration signaled it would recognize the 1915 mass killings of Armenians as genocide, putting strain on already tense US-Turkish relations.
