The inflation storm gradually cooled at the end of last week. Measures of US financial inflation expectations, including the breakeven inflation (10-y, 2.54%) and inflation swaps (10-y 2.65%) eased slightly off multi-year peak levels. EMU inflation swaps (10-y 1.67%) stay within reach of the 2018 top. Friday’s ‘ceasefire’ triggered a nice equity rebound, but this part of the story didn’t continue today. On a day without a high profile eco narrative, US and European equities are falling prey to modest profit taking (Nasdaq -0.75% underperforming). Recent top levels are still within reach, but there is no strong enough driver to trigger a new upleg. It even isn’t clear what news markets need to continue this longstanding risk rally. Do investors need some comfort that inflation (expectations) won’t spiral out of control? Similar question on activity data. Do markets want confirmation on the economic rebound accelerating further? Or are signs of moderation also welcome to sustain a positive risk sentiment, in particular in the US? Today’s US empire manufacturing survey didn’t bring any guidance to solve this debate. Global business conditions eased slightly from 26.3 last month to 24.3 in May. Indices on current price levels rose further. Subindices on future prices and activity showed tentative signs of reaching a plateau. Whatever the details, the report didn’t change the overall picture of the US economy. US yields are rising marginally (1.2 bps for 5 & 30y). European/German bonds again slightly underperform with the German 10y yield rising by 2.2bps. The German 10-y yields extends its journey beyond the -0.14%/-0.15% top of the longstanding sideways range. The rise in core European yields and uncertainty on the pace of future ECB PEPP bond buying also continues to weigh on peripheral EMU bonds. Spanish, Portuguese and Greek 10-y spreads are widening a further 2 bps. Italy widens 3 bps bringing the 10-y yield at the highest level since July last year (1.13%). The internal ECB debate on what level of accommodation is needed doesn’t become easier.
The picture for the dollar remains fragile but indecisive at the same time. Despite the risk-off, EUR/USD drifted north to the 1.2169 area, but a real test of the 1.2182/1.2243 resistance again didn’t occur. Early in US dealings, the pair returned to the 1.2145 area. The DXY index also trades little changed from opening levels (90.33 area). USD/JPY slightly underperforms (109.15). EUR/GBP basically followed the intraday EUR/USD pattern. A temporary rebound to the 0.8630 area was reversed (currently 0.8610). Sterling traders will get an in extenso update on the UK economy later this week, starting with the labour market data tomorrow, followed by price/CPI data on Wednesday to concluded with retail sales and PMI’s scheduled for release on Friday.
Hungarian deputy governor Virag said that the central bank should consider raising its benchmark rate in June as part of a “data-driven” tightening cycle to counter surging prices. Headline inflation surged above 5% Y/Y in April and the MNB wants to react to sustained inflation risks. Up until now, the MNB kept a wait-and-see approach though it flagged higher sensitivity to price developments. Unconventional stimulus measures will be phased out eventually, though QE will continue and volumes may even rise if warranted. The Hungarian swap curve bear flattened with yields rising by 14.5 bps (2-yr) to 0.4 bps (15-yr). The forint enjoys the yield support with EUR/HUF falling below the 353 support are to the high 351-zone. That’s the strongest HUF-level since August last year.
EC VP Dombrovskis, US Trade representative Tai and US Secretary of Commerce Raimondo announced the start of discussions to address global steel and aluminum excess capacity. They agreed to chart a path that ends the WTO disputes following the US application of tariffs on imports from the EU which started in 2018 under US President Trump. The agreement de-escalated trade tensions between the two and avoids a doubling of EU duties next months on several US goods.