Markets
The equity sell-off took a breather yesterday. European stocks eked out gains of less than 1%. Markets in the US slid early in the open but rebounded later, ending the session with gains for the S&P (0.25%) and the Nasdaq (0.98%). They found some comfort in further declining core bond yields.
Fed and ECB talk remained hawkish but didn’t bring any new insights. Fed members Waller, Bostic, Williams and Mester all backed 50 bps for the next two (maybe three) meetings. Mester stood out in not ruling out a 75 bps “forever”. It helps explain the underperformance of the short end of the US curve despite a strong $45bn 3y auction. Yields rose 2 bps in the 2y but eased up to 4.3 bps in the 7-10y sector.
German Bunds outperformed the US. The curve bull flattened with changes ranging from -6.8 bps (2y) to -9.5 bps (10y). Peripheral spreads narrowed. Italy (-5bps) outperformed. ECB’s Nagel and de Guindos indicated in a speech their preference for a rate hike lift-off in July but had limited impact. Markets are a few bps short of fully pricing in such a scenario.
Oil prices eased for a second day straight. Natural gas diverged by erasing earlier losses and gaining 11% from the intraday lows after Ukraine said Russian gas flows to one of the two key entry points that serve as a transit to Europe will halt from today on.
The dollar on FX markets reversed early weakness into marginal strength. EUR/USD retreated to 1.053, USD/JPY held above 130. UK PM Johnson signaled readiness to tear the NI protocol apart in the wake of the Northern Irish elections last week, saying it was undermining the Good Friday Agreement. It brings the UK back at collision course with the EU. For now, sterling has little attention for the matter but it’s worth following up. EUR/GBP held a tight sideways trading range around 0.855.
China reporting a decline in Covid cases make its bourses jump to the tune of 2-3% this morning, outperforming during a mixed Asian trade session. It helps the yuan strengthen a bit for the first time in five days despite a mixed CPI reading. The USD trades lower in general. Core bonds hover sideways.US CPI in April is expected to have slowed down to 8.1% from 8.5% (6% from 6.5% in the core). These are largely statistical base effects at work. The key question at the current junction, however, is how strong the monthly dynamics still are. In the end, this will determine how quickly yearly inflation will return to its goal. We believe the monthly (core) figures will remain elevated for some time still.
In Europe another carpet bomb of ECB speeches is coming our way. Our attention goes in particular to ECB’s Lagarde. Will she side with the likes of Nagel, Wunsch and de Guindos? It would mark a dramatic turnaround, one that the euro and bond yields would surely notice. If she keeps kicking the can down the road, EUR/USD may lose the 1.05 barrier today.
News Headlines
Price rises in Hungary accelerated at a faster than expected pace in April, jumping 1.6% M/M to 9.5% Y/Y (was 1.0% and 8.5% in March). Core inflation data as published by the central bank also rose, accelerating from 9.1% to 10.3%, reaching the highest level since 2001. Monthly prices gains were broad-based across different sub-categories with food (3.6%), clothing (2.8%), housing (0.9%), furnishings (1.7%) and transport (0.9%) catching the eye. As such, inflation is moving further away from the MNB 3.0% target. The data keep pressure on the MNB to continue monetary tightening. The 2-y swap rate yesterday rose 7 bps tot 8.50%. The forint traded marginally stronger in the EUR/HUF 380 area, but this was mainly due to a better risk sentiment.
China April price data this morning showed a mixed picture. Headline CPI rose from 1.5% Y/Y to 2.1%. Comments from the Statistics Bureau attributed the rise to the virus outbreaks and higher global commodity prices. A rise in energy and food costs was the main driver behind the rise. Core inflation ex food and energy eased to 0.9% from 1.1%, suggesting less demand driven price pressures. PPI in April even slowed from 8.3% Y/Y to 8.0% Y/Y. The NBS attributed this decline to measures of the government to stabilize commodity prices and improve supply. Today’s data are no obstacle for Chinese authorities to keep their efforts focused on (selective) measures to support growth. After a substantial weaking over the previous weeks, the yuan today gains marginally (USD/CNY 6.722).
