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Sunset Market Commentary


ECB policy makers keep up the July rate hike rhetoric. ECB Muller, de Cos and Rehn were today’s chosen ones. Interestingly, more governors start talking about what could come next after an inaugural July move. ECB Rehn was most outspoken, suggesting broad agreement amongst ECB members that negative interest rates should end “relatively quickly”. Tomorrow’s Minutes could give us some more flavour on how fast the mindset amongst governors is changing these days. This week’s comments in any case point to the fact that Frankfurt’s reaction function will likely be in line of the one of other normalizing central banks: hiking rates at any possible opportunity and showing preparedness to step it up (eg ECB Knot yesterday or Holzmann earlier) in magnitude if necessary. European money markets picked up the signal again with 3m Euribor futures rising around 5 bps in yield terms in the end 2022/end 2023 segment. European yield curves bear flatten. German yields add around 6 bps at the front end while trading more or less stable at the very long end. As we effectively approach the start of the tightening, we’ll probably see more of those flatteners in Europe. Up until now, the rising yield environment mostly came with (bear) steepeners. The US yield curve flattens as well today, but moves are less outspoken than in Europe. Daily changes vary between +2.2 bps (2-yr) and -0.5 bps (30-yr). The relative interest rate support couldn’t establish a further comeback of the single currency against a generally better dollar today. The pair changes hands in the low 1.05-area for most of the day. Key support is still located at 1.0341 while first, minor, intermediate resistance at 1.0642 remains untested. Stock markets lacked yesterday vigor and help explain the relatively better USD performance. Today’s only datapoints were US housing numbers. They gradually start to show an over-the-top market, but alarm bells aren’t really ringing yet. April housing starts stabilized on a monthly basis (-0.2% M/M) while building permits declined by 3.2% M/M. Sterling grabbed quite some headlines as well over the past couple of sessions. This morning’s highest inflation print since 1982 (6.2% Y/Y for core and 9% Y/Y for headline) didn’t really came as a surprise. Yesterday’s heavy UK Gilt sell-off initially didn’t continue, capping sterling’s comeback as well. It was only later in the session when UK Gilts start following especially European bonds south, capping EUR/GBP’s intraday march from 0.8440 towards 0.85. News Headlines

Headline inflation in Canada accelerated by 0.6% m/m to 6.8% in April, up from 6.7% last month. Expectations were for a stabilization. The three core measures watched by the Bank of Canada crushed consensus, coming in at an average 4.23% compared to 3.83% expected and faster than an upwardly revised March (from 3.76% to 3.93%). Shelter (1.1% m/m) and food (0.9%) were among the biggest contributors. Transportation (0.5%) eased considerably after a 3.5% surge in March with gasoline prices (a subcategory) even printing a 0.7% decline. Today’s outcome further solidifies market expectations for more 50 bps rate hikes (at least three through the September policy meeting) by the Bank of Canada after delivering such a large increase in April. The Canadian swap yield curve bear flattens with yields up by more than 4 bps. Moves occurred already before the CPI publication though. The Canadian dollar trades almost unchanged in the 1.282 area.

The Norwegian government updated its outlook for gas deliveries in 2022. They are now expected to hit 122 billion cubic meters, up 8% (or 9 billion cubic meters) compared to last year. If realized, the gas sales would rival the record sales seen in 2017. “The companies are producing at full, or near full capacity. High prices give the company’s strong incentives to utilize the production capacity on the fields”, Minister of Petroleum and Energy Terje Aasland said in a statement. Demand is higher than ever as Europe seeks to cut Russian imports this year by two-thirds. Gas flows from Russia to the bloc exceeded 155 billion cubic meters, or 40% of total consumption, last year.

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