Trading on global markets today enters calmer waters to finish a week with quite some wild swings. Early this week, it looked that established trends could simply continue. Long term yields in the US (30-y 3.30%; 10-y 3.20%) and Europe (German 10-y 1.18%, EMU 10-y swap 2.0%+) still touched new cycle peak levels. The EMU 2-y swap also temporarily surpassed 1.0%. In hindsight, maybe there was already an underlying warning signal as both EMU and US inflation expectations/10-y inflation swaps were drifting off recent peak levels. However, initially this was still more than counterbalanced by a higher real yield. This dynamic changed after the publication of higher than expected US (core) inflation on Wednesday. A brief attempt of yields to continue their uptrend was rejected and triggered a sharp reversal in interest rate markets which later was followed by broad sharp risk-off repositioning. Economic analysts concluded that investors grew uncertain whether central bankers would be able to do enough to bring inflation back under control without hurting growth too much. More technically oriented analysts probably will advocate that the almost uninterrupted uptrend in yields since the turn of the year was simply ripe for a correction. Whatever the narrative, both US and EMU/German yields sharply tumbled back the below the above mentioned high profile levels. ECB’s Lagarde opening the door for a July ECB rate hike didn’t help to slow the correction. Today interest rate markets apparently found a first short-term equilibrium. In a session devoid of key economic data (U. of Michigan Consumer confidence will be published after finishing this report), US and German yields rebound. US yields are gaining between 4 bps (2 & 30-y) and 6 bps (10-y). German yields are rising between 4.5 bps (2-y) and 8 bps (10-y). Remarkably, gains in EMU swap rates are limited. The ‘return to normal’ on interest markets also filtered through into equity markets. European equities mostly regain about 1.50%/1.75%. The risk of further mutual economic retaliation between Russian and Europe moved a bit to the background. US indices opened similar gains (Nasdaq +1.90%, S&P +1.25%). Oil rebounds further, with brent trading at $ 110 p/b.
The sharp swings post the US CPI data also triggered a standard risk-off repositioning on FX markets. The dollar fully played its safe have role with the DXY TW index yesterday touching the highest level since 2002, just below the 105 mark. However, the yen also made a somewhat remarkable comeback with USD/JPY easing off the 131+ levels reached earlier this week. A less negative interest rate differential apparently helped the yen. Today, the DXY index (104.90) continues testing the multi-year peak. USD/JPY returns to the 129 area on a risk-on sentiment and higher core yields. The euro remains in dire straits. The risk-off repositioning pushed EUR/USD below the 1.0472/1.05 support. The prospect of an ECB lift-off in July didn’t provide any relief. Even in a more constructive sentiment, EUR/USD today still feels the forces of gravity (EUR/USD 1.036). The 1.0341 2017 low is only a whisker away. Poor Q1 growth data and division within the BoE on the pace of further rate hikes temporarily pushed EUR/GBP above 0.86 yesterday. However, euro weakness ‘restored’ the EUR/GBP balance rate with the pair today trading in a tight range close to/slightly above 0.85(1).
The Hungarian central bank’s vice governor Virag said the central bank is transitioning from an “aggressive” tighten cycle to a more gradual one. His comments came after Hungarian CPI accelerated to a faster-than-expected 9.5% (10.3% even for core inflation) and may have yet to peak at 10%+ by the end of Q3. It thus suggests the MNB stays patient rather than want to shock markets with sudden rate hikes. KBC Economics expect the one-week deposit rate to be raised to 7.5% by 2022Q3 and that the gap with the base rate gets closed by the end of June. Risks are to the upside (ie higher rates). Them materializing is dependent on several factors including fiscal policy, global central bank actions and the exchange rate. Regarding the latter, we think the MNB would like to see EUR/HUF fluctuating between 360-370. Since Virag’s speech, the forint weakened further from EUR/HUF 380 to 384.65 today.