A high level of uncertainty continued to dominate trading yesterday. US data (durable orders, house prices, consumer confidence or the Richmond Fed man. index) were OK or even better than expected, but unable to prevent further equity selling especially in the US. Uncertainty on China growth added to uncertainty. Later, investors had to digest the announcement that Russia would stop gas deliveries to Poland and Bulgaria as the refuse to pay in ruble. US indices tumbled from 2.38% (Dow) to 3.95%, (Nasdaq).
The risk-off this time also translated in a further sharp correction in US yields with the curve bull steepening. 2-y yields declined 15 bps. The 30-y lost 6.1 bps. The decline again was mainly due to a decline in inflation expectations. Remarkably, moves in European yields were modest with The 2-y German bund yield rising marginally (0.3 bps) but the longer end bull flattening (30-y minus 3 bps). Cash trading in Bunds halted before the announcement of Russia stopping gas supplies to Poland and Bulgaria.
In FX, the dollar outperformed with the DXY trading well north of 102 and nearing the corona top (102.99). The euro and sterling were again hit hard as markets are still looking for more concrete insights on how the BoE and the ECB will handle the balance between deteriorating growth and rising inflation. EUR/USD closed at 1.0638, almost at the key 1.0636 corona low. Cable closed at 1.2575, with sterling even underperforming the euro (EUR/GBP 0.8459).
Lower core yields and a support package of the Japanese government provided relief for the yen. USD/JPY closed at 127.23 (from 128.14). CEE currencies already suffered from an uncertain global sentiment and came under further pressure after the Russian announcement of stopping gas supplies. EUR/PLN closed 4.716 (from 4.6430).This morning, Asian markets trade mixed, despite the sell-off in WS yesterday. Price action will be driven by global sentiment with investors assessing the impact of a potential further escalation in economic sanctions between Russia and Europe.
Interest rate markets still haven’t found out how to strike the balance between inflation and growth risks. US yields are rebounding sharply this morning (2y +9 bps). European yields yesterday also declined only modestly despite global uncertainty. So, maybe the room for a further decline in EMU swap yields might be limited, despite risks to growth. The euro clearly is becoming an additional source of concern for ECB. A sustained break below 1.0636 brings EUR/USD at the lowest levels since April 2017, with 1.0341 (2017 low) next target on the charts. In case of further sterling underperformance, EUR/GBP 0.8512 is the next reference on the charts.
In an interview conducted on Monday, CNB board member Holub said the central bank needs to continue its tightening cycle with at least 50 bps at next week’s meeting. The extreme price pressures, almost 13% in March and bound to rise further, must be prevented from entrenching, he argued. Russia’s war with Ukraine poses economic risks but according to Holub, this may not be an excuse to cool domestic demand which is still very strong thanks to the tight labour market. Adding to his conviction for higher rates is that elevated inflation expectations make the current key rate at 5% less restrictive than usual. Holub said last week there’s “no ceiling” for Czech rates, but in the interview he sided with market expectations of a 6% terminal rate. The Czech crown slid to EUR/CZK 24.58 yesterday in a broader, risk-off driven CE currency sell-off.Australian inflation accelerated significantly more than expected in Q1. Headline CPI came in at 2.1% q/q to be up 5.1% y/y, from 3.5% in 2021Q4. Core measures quickened between 3.2-3.7% y/y. All but one of the categories saw price increases in the past quarter. Transportation (4.2% q/q) showed one of the biggest advances, driven by soaring fuel prices. Food (2.8% q/q) inflation was remarkably high as well. The reading ups the ante for the RBA at the policy meeting next week. Armed with new forecasts, it now may be enough for a 15 bps rate lift-off to bring the policy rate to 0.25%. Bets were previously for a start in June, because of important data (Q1 wage growth) only available after the May meeting. The country also holds general elections on May 21. Australian swap yields jump more than 10 bps this morning. The Aussie dollar rebounds after a recent slide to AUD/USD 0.718.