European stock markets started in good spirits today. They tried to recoup some of yesterday’s loses by opening with a little less than a 1% gain. After some intraday volatility, gains are currently capped to 0.5%. WS opens mixed. Meanwhile, more ECB governors, including from the dovish side (eg. Panetta), argue in favor for ending negative policy rates, be it in gradual (read: 25 bps) manner. Even chief economist Lane said “it’s appropriate to normalize”. Dutch governor Knot in two separate speeches said he fully supported Lagarde’s blog post setting out at least two consecutive 25 bps rate hikes earlier this week only to nuance that a bit later by adding that 50 bps rate hikes are not off the table. Vice-governor de Guindos tied bigger rate increases to the (inflation) outlook. The debate in any case remains open and next Tuesday’s EMU inflation numbers will provide crucial input. In the (long) run-up to it, German bunds extend yesterday’s gains. Yields ease 2.6-4.5 bps across the curve. US Treasuries underperform slightly. Changes vary from +0.1 bp (2y) to -2.5 bps (5y). The 10y yield (-0.7 bps) is extensively testing the 2.72% support level. Yields extended their intraday decline after lower-than-expected durable goods data for April. All measures for orders came in below consensus and saw their March figures revised downwards. The latter was also the case for actual capital good shipments (a proxy for investment), putting a dampener on the consensus beat for April (rose by 0.8% m/m vs 0.5% expected). UK Gilt yields stabilize after yesterday’s uppercut.
Turning to FX markets, the euro felt some selling pressures. Perhaps interest rate differentials at the short end of the curve did their part. Either way, EUR/USD lost the 1.07 one day after recovering it. It does, although barely, manage to keep north of the 1.0642 support level. The dollar in general is in better shape too after a rough few days. The trade-weighted index rebounded from 101.77 to 102.36. The Swiss franc is the runner-up for today, strengthening more than half a percent against the euro. EUR/CHF slips sub 1.03 to 1.025 after SNB president Jordan said he’s closely watching rising inflation rates. It’s the second verbal (rate) warning in one week. The Japanese yen finishes the top three. It still loses against the USD (USD/JPY 127.19) but appreciates vs the euro (EUR/JPY 135.55) and all other G10 peers. Sterling recouped a nice chunk of the PMI driven losses yesterday. EUR/GBP eases from 0.857 to 0.852.News Headlines
Polish eco data today showed a mixed picture. Consumer confidence weakened in May from -37.2 to -38.4, holding close the low levels reached in March after the Russian invasion in Ukraine. Consumers turned more pessimistic on current personal finances and the economic situation. A similar picture was also visible in the expectations for the next 12 months with in particular the outlook on the economic situation but also on unemployment deteriorating. The latter is not (yet) confirmed by hard data published today. The unemployment rate declined further from 5.4% in March to 5.2% in April. The number of unemployed people is now lower by 2.7% M/M and 16.6% Y/Y. The zloty recently was a relative outperformer in the region as the NBP for maintains its anti-inflation stance. However, the psychological barrier of EUR/PLN 3.60 proves a strong hurdle for the zloty. EUR/PLN again trades near 4.615.
The Hungarian forint again underperforms the region with EUR/HUF trading at around 388.75, putting the MNB in a difficult position. The move is at least partially inspired by PM Orban announcing a state of emergency in the country with new measures under the new regime expected soon. On monetary policy, MPC vice governor Virag recently indicated that the MNB wants to slow the pace of rate hikes to 50 bps from 100 bps. This probably means that it will take longer to close the gap between the base rate (currently 5.4%) and the one week deposit rate (currently 6.45%). The MNB probably also prefers to adjust one week deposit rates only once a month. Given recent forint developments there is little room for the MNB to slow the pace of hikes of the weekly deposit rate from the current 30 bps p/m, on the contrary.