Sat, Jun 10, 2023 @ 18:05 GMT
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Solid Rally in Fixed Income on the Back of Negative Sentiment in Equities

Market movers today

In Germany and France, we get consumer confidence surveys for June and May, respectively. However, while these surveys have painted a bleak picture of the state of the consumer, actual spending has held up quite well so far.

In the US, the FOMC minutes may contain some details on the discussions but nothing which should move markets significantly, in our view, as we have a pretty good idea of what the Fed wants to do over the next few meetings, although we will be looking for mentioning of a possible 75bp hike and some QT details. We also get core capex expenditures in April.

As Danske Morning Mail will not be released the next two days due to holidays in Denmark, a key focus in the US on Friday is the personal consumption expenditure data for April, which includes the Federal Reserve’s preferred inflation measure, PCE core. Another key element is to see how goods and service consumption are faring amid the full opening of the US economy after the COVID-19 pandemic.

The 60 second overview

Another volatile trading session in the global financial markets yesterday with equity markets declining, while bond prices were rising and 10Y US Treasuries ended the day at 2.76%. This morning 10Y Treasuries have remained at 2.76% in Asian trading hours. There have been modest gains in Asian equity markets this morning after the sell-off yesterday.

The Reserve Bank of New Zealand hiked the official cash rate (OCR) by 50bp to 2.00% overnight, in line with expectations and market pricing. However, RBNZ also signalled more aggressive front-loading of coming rate hikes and higher terminal rate, as the updated rate path indicates that the OCR will reach 3.75% in Q1 2023. The broad-based rise in inflationary pressures, further uptick in inflation expectations and tight labour market conditions warrant more aggressive tightening even despite the rising recession risks. RBNZ projects that inflation will peak during Q2, but it also sees unemployment rate starting to rise from Q3 onwards as rising costs and tighter financial conditions weigh on aggregate demand. NZD FX gained support from the hawkish decision, but the current environment of slowing growth and tightening financial conditions does not appear favourable for NZD especially vis-à-vis USD despite the projected rapid hiking cycle.

Today, we have a string of speeches from ECB officials including Lagarde, and the market will be looking for comments on monetary policy after Lagarde pre-committed to a rate hike of 25bp in July.

The risk of a Russian default is moving closer as the US government has said it will let a sanctions waiver expire today at noon. The sanctions waiver had allowed Russia to pay bond holders through American banks. Hence, Russia may default during the summer as this waiver has expired.

FI: Yesterday, there was a solid rally in the fixed income markets on the back of the negative sentiment in the equity market. 10Y German government bond yields declined some 6bp and ended again below 1%. 10Y Treasuries declined 10bp. The 2-10Y curves flattened in Europe from the long end and the Bund ASW-spread widened almost 2bp, but has been range-trading around the 75bp-level.

FX: GBP, SEK and CHF gained the most among G10 currencies yesterday, where GBP, CAD and NZD were biggest losers. Of noticeable moves, the move in EUR/USD above 1.07, EUR/GBP up towards 0.86 and USD/JPY below 127.

Credit: Credit spreads as measured by EUR CDS indices were slightly wider yesterday, with iTraxx Main widening 2bp to 98bp and Crossover wider by 7bp to 479bp. Nonetheless, the primary market was busy and saw issuance of bank and insurance Tier 2, marking the return of EUR capital trades for the first time since early April.

Danske Bank
Danske Bank
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