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Rate Cut in China and Inflation in Japan

Market movers today

Today we get the euro area consumer confidence data for May. A rebound from the very depressed levels would be a welcome sign, but it might be too early in light of the mounting headwinds from still rising consumer prices.

We also get consumer confidence in Denmark. We expect rising prices are still being felt by consumers who will therefore have a negative opinion of their own finances. In contrast, we expect consumers’ views on the Danish economy to improve, as the economy is still in fine fettle and the war in Ukraine has not escalated further.

In Norway, Friday brings Norges Bank’s expectations survey for Q2. Both wage and price expectations have risen steadily since the start of last year, so the big question is whether they will now turn or keep on climbing. We will also be keeping a close eye on business leaders’ profitability expectations.

Several ECB speakers are also on the wires.

The 60 second overview

Rate cut in China: Overnight, the People’s Bank of China (PBoC) cut the five-year loan prime rate (a reference for mortgage rates), to 4.45% from 4.60%, which was larger than anticipated. The Chinese housing market has been under pressure for several months and both home sales and prices are declining. Additionally, the rest of the economy is under pressure from COVID-19 lockdowns. Unlike Western central banks, PBoC is in easing mode, which eventually should support global growth, all else equal. The rate cut supported risk sentiment overnight and Chinese stocks are up this morning.

China may buy cheap Russian oil: Apparently, China is in talks with Russia (at government level) as China would like to buy (cheap) Russian oil for its strategic reserves. Russian oil is trading with a discount because of fewer Western buyers.

Inflation in Japan: CPI inflation excluding fresh food in Japan rose to 2.1% y/y in April from 0.8% in March, slightly higher than consensus of 2.0%. Total CPI inflation rose to 2.5% y/y. High inflation is to a large extent a global phenomenon, which now seems to have arrived in Japan as well, although inflation remains significantly below what Europeans and Americans are currently experiencing. Bank of Japan is unlikely to react to above-target inflation just yet, as they would like to see it on a more sustained basis, also because inflation has been too low for so many years. The combination of easy monetary policy and weak JPY puts upward pressure on Japanese prices.

FI: Classic risk off moves dominated markets yesterday leaving yield curves bullish flattening and intra euro area spreads wider on continued concerns about growing recession risks. Bunds ended 8bp lower. The ECB minutes had no particular news. Swap spreads widened 2bp yesterday. In the late afternoon, media reported that the EC is set to prolong the suspension of the deficit and debt rules through the end of 2023. There was no immediate effect on peripheral spreads.

FX: Yesterday, broad USD depreciated despite still poor risk sentiment with notably EUR/USD briefly crossing the 1.06 mark. We still believe however, that USD weakness is temporary as we still see the current environment as USD positive. EUR/CHF fell below 1.03. EUR/DKK rose to around 7.4430, the highest level since March.

Equities: The free fall in equities took a breather on Thursday, with both Europe and US holding up fairly well. Nor were there any clear preference between cyclicals vs defensives: Materials and consumer discretionary outperformed, but also health care. Implied volatility moved somewhat lower. S&P closed down -0.6%, Nasdaq -0.3%, Dow -0.8% and Russell 2000 0.1% higher. US futures are 1% higher this morning.

Credit: Credit spreads followed equities in a bearish rout on Thursday. Itraxx Main closed 1.9bp wider, ending the day at 98.5bp. This was after briefly moving as high as 101.5bp intraday. Itraxx Crossover ended the day 11.2bp higher, to close at 476bp, after reaching slightly more than 493bp intraday. Aside from March 2020, the intraday high was the widest level seen in Crossover since the European debt crisis 10 years ago.

Nordic macro

Today brings Norges Bank’s expectations survey for Q2. Both wage and price expectations have risen steadily since the start of last year, so the big question is whether they will now turn or keep on climbing. We will also be keeping a close eye on business leaders’ profitability expectations, as overall costs are now rising so quickly that margins have to be coming under pressure. This could put a damper on wages despite the tight labour market.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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