Market movers today
The most important data releases today will be the Euro Area Sentiment indicators for May, as well as the German and Spanish flash CPIs. They will both give an early sense of tomorrow’s Euro Area Flash HICP, where we look for a pick-up in both headline and core inflation.
Later in the week, we will get the official May PMIs for China as well as the ISM PMIs for the US. Finally, we expect another strong US jobs report on Friday with 400 thousand new jobs in May. We will also have a range of central bank speeches throughout the week, including Fed’s Waller this evening. This round of data is the last ‘batch’ of data before the important central bank meetings.
The 60 second overview
Inflation: The yoy US PCE deflator was lower than the previous monthly reading for the first time since November 2020, albeit slightly better than market consensus (PCE deflator came in at 6.3% for April compared to March at 6.6%). While one should naturally always be cautious about calling a peak to the inflation, in particular as the monthly change was still 0.2% (but well below the previous 0.9%) in this environment with elevated uncertainties, the inflationary pressures are still significantly too high for the Fed to change course on its tightening path.
FOMC minutes: The FOMC minutes released on Wednesday did not contain new signals. 75bp was not mentioned at all at the meeting and the market had no significant reaction to it. We still see risks skewed towards faster tightening, as underlying inflation pressure remains too high despite markets pricing in a lot of rate hikes this year.
Oil: Overnight media reported that EU failed to reach a package revising its current sanctions, including a ban on Russian oil, as Hungary is refusing to back the proposal. Negotiations are set to continue today ahead of the special EU council starting tonight.
COVID in China: Shanghai announced new policies to support the economy to cope with the economic fall´-out from COVID restrictions. Most important is that companies do no longer need to be on the ‘whitelist’ to resume its production from 1 June. Furthermore, an acceleration of approvals in the construction sector is planned. Shanghai plans to loosen the test requirements in June. Beijing seems to have recorded the worst of the COVID outbreaks.
FI: Towards the end of last week, the volatility in rates markets settled down amid early indications that inflation may have peaked in annual terms as the US PCE deflator was lower than the previous monthly reading for the first time since November 2020 (in April at 6.3% compared to March at 6.6%). One should naturally always be cautious about calling a peak to the inflation (mom was still 0.2%), especially in this environment with elevated uncertainties. Focus early this week is on the inflation prints from the euro area (some country releases today and Euro Area release tomorrow), and later in the week focus turns to the US labour market report as both the ECB and Fed enters its silent periods this week.
FX: With credit starting to price in levels similar to other peak events (absent a major blow-out like 2008 or the COVID shock), the potential for a mild volatility compression might very well drive a push towards Scandies and high beta EM carry.
Credit: iTraxx Main was 2bp tighter to 87bp on Friday, closing the week 13bp tighter on the back of improving risk sentiment. Meanwhile, iTraxx Crossover tightened 8bp to 431bp, ending the week 57bp tighter.