Markets
US data, be it jobless claims, Q1 GDP, personal consumption, core PCE or pending home sales, were (very) strong across the board yesterday. It highlights the strong US recovery as its economy emerges from the lockdowns. US yields at some point rose almost 8 bps (10y) before paring some of the gains. It suggests markets are at least struggling to just blindly follow the Fed’s guidance of keeping policy ultra-easy for a very long time. Eventual US yield changes varied from 1.3 bps (5-yr) to 2.6 bps (10-yr). Assisted by a blowout EC economic confidence, long European yields pierced through key technical levels. The 10y European swap rate smashed the previous February recovery high near 0.10% to finish at 0.148%. Germany’s 10y yield hopped beyond similar resistance near -0.20% to end the day at -0.19%. Other yield changes amount to 2.2 bps (5-yr) to 4.9 bps (30-yr). The intraday partial reversal in US yields was much less visible in Europe, possibly because of an upbeat speech by Lane at that time. The ECB Chief Economist said the EA economy reached an inflection point, expecting a “good recovery throughout the rest of this year”. He sees growth picking up in Q2, accelerating further in Q3 to eventually reach pre-pandemic levels in Q4. EUR/USD took a little breather after decisively taking out 1.2103 resistance the day before. The pair finished marginally lower at 1.2121. Japan’s yen remained under pressure vs. both the dollar (USD/JPY just shy of 109) and euro (EUR/JPY 132.01). EUR/GBP closed unchanged south of 0.87.
Chinese April PMIs were slightly below expectations this morning. Manufacturing edged lower from 51.9 to 51.1 as output (52.2), new orders (52), and employment (49.6) eased. A decline in new orders (51.5 from 55.9) was the biggest drag for the non-manufacturing index which fell from 56.3 to a still lofty 54.9. The yuan trades a bit stronger nevertheless (USD/CNY 6.47) as the recovery trend remains intact. The yen holds steady after mixed data (cf. below). Other FX moves are limited in quiet trading. The German Bund slightly outperforms USTs. Asian stocks retreat.
An early French GDP release this morning (0.4% q/q vs. flat expected) flags upside risks to the European figure, estimated at -0.8% q/q, later today. In the same vein, we brace for the above-consensus European HICP in the wake of Spanish and German publications yesterday. Strong European data should help yields to hold their ground above key levels broken yesterday. A both weekly and monthly close in such case strengthens the technical picture further, effectively paving the way for e.g. the European 10y swap yield towards heavy resistance around 0.21/0.23%.EUR/USD ideally is supported by the data but its next technical reference (1.218 area) might be too much of a stretch for today. In any case, 1.2103 has to and should hold going into the weekend. Sterling investors are gradually turning attention to the Bank of England next week. This might mean yet another meaningless sideways EUR/GBP session.
News Headlines
The FT reports that Spain has finalized its plan to claim €140 bln support from the EU coronavirus Recovery Fund. The Spanish government intends to receive €70 bln of grants between 2021 and 2023 and aims to draw on €70 bln of loans in the period 2024/26. The country proposed over 100 of reforms that should support an adequate use of the funds. There is internal debate on the degree of growth support that might be expected from the resources. The government already revised down its growth forecast for this year from 9.8% to 6.5% as part of the EU probably will be available for spending later than expected.
Japanese economic data this morning were mixed with activity data showing resilience to the current corona measures but price data still indicating persistent deflationary pressures. Japan’s industrial production unexpectedly rebounded in March by 2.2% M/M (-2% expected) to be up 4.0% Y/Y, driven by a jump in cars and chemicals. The manufacturing PMI from April rose to 53.6, the highest since February 2018. The Japanese jobless rate also unexpectedly dropped from 2.9% to 2.6%. At the same time, headline CPI in the Tokyo area declined from -0.2% Y/Y to -0.6% Y/Y. Core measures also dropped to -0.2%, mainly caused by cuts in mobile phone fees.
