It’s just one of these days when you don’t know where to look first on markets. We’ll start with the most obvious one this year: fixed income. Ever since Monday’s early push for new recovery highs failed, yields are in decline. Bar the early stages on the Russian invasion in Ukraine, it’s only the first meaningful correction since the upleg accelerated around the turn of the year. A drop in inflation expectations is the main culprit. Given that it is accompanied by lower instead of higher real rates (especially in the US), it suggests doubt on the growth outlook rather a real downscaling of tightening expectations by central banks. European (real) rates even tend to increase somewhat (off low levels) given that the ECB finally wants to pursue an inflation-fighting strategy even as it comes with an economic cost. US yields lose 6.7 bps (30-yr) to 10 bps (5-yr) today with the belly of the curve outperforming the wings. German Bunds outperform US Treasuries with German yields sliding by 10.4 bps (2-yr) to 14.2 bps (5-yr). 10-yr yield spreads narrow by up to 2 bps for the semi-core and by 5 to 9 bps for the periphery (Italy outperforming).
European stock markets shed 1.5% to 2.5% today, allowing us to label yesterday’s action a dead cat bounce. Main US equity gauges open 1% to 2% softer. The podium in FX space goes to the Japanese yen (1), US dollar (2) and Swiss franc (3). USD/JPY finally leaves the 130-zone behind to firmly correct towards the low 128-area. Against all other currencies, the greenback shows its strength. Resistance zone all of sudden give away like nothing. The trade-weighted dollar moves beyond 103.82 resistance (2017 top) to change hands around 104.40, its best level since 2002. EUR/USD drops through the 1.05 floor and temporarily even through 1.04 with the 2017 bottom of 1.0341 only inches away. It proves our fear that it will take more than a rate lift-off by the ECB to restore credibility in its institution and its single currency. USD/CNY pushes from 6.7 to 6.8, the highest level since September 2020 with CNY-weakness adding to the picture (lockdown and easing related). EUR/GBP seems to be the odd one out today. Failure to take out KEY resistance at 0.86 this morning triggered significant return action lower (0.852). We acknowledge hawkish comments by BoE Ramsden, but these don’t weigh against today’s risk-off market climate.
The Czechs get a lot of market attention this week. The Czech National Bank (CNB) held an extraordinary meeting today. It announced it intervened on FX markets in a reaction “to the sizeable depreciation of the koruna in recent days”. The CNB made the goal pretty clear: preventing a longer-term weakening of the currency at a time of skyrocketing inflation. Rumours last week and then the actual confirmation yesterday of monetary dove Michl as the next CNB president delivered a one-two punch to the koruna. EUR/CZK jumped almost a full big figure from 24.5 to 25.5, nearing levels seen in the wake of the Russian invasion. Back then, the CNB intervened too. EUR/CZK retreats to below 25 following the CNB’s actions today.
Swedish April inflation topped estimates on all accounts. Headline inflation rose 0.6% m/m to 6.4% y/y. That’s up from 6% in March and more than the 6.2% expected. The gauge using a fixed interest rate (CPIF, watched closely by the Riksbank) printed exactly the same. Core CPIF (ex. energy) soared 0.9% m/m to be 4.5% higher compared to the same month last year. The Riksbank last month embarked on a tightening cycle, raising rates to 0.25% and announcing two or three more hikes this year. Governor Ingves on Tuesday said there will be “a super focus” on the April reading. He added there are no technical limitations to a 50 bps hike but it wasn’t something to “in front of [them] at the moment”. But with April inflation already surpassing the bank’s projections, this might have just changed. The Swedish crown outperforms Scandinavian peers today. EUR/SEK weakens to 10.55.