Market movers today
The key data release today will be the Euro Area Flash HICP for May. Following the high country releases (more below), we see significant upside risks to our original expectations at 8.1% y/y and core inflation at 3.6% y/y. Overnight, Chinese Caixin Manufacturing PMI will also be released. The official PMI manufacturing released this morning was still in contractionary territory of 49.6, but higher than the previous month at 47.4.
The National Bank of Hungary will have a monetary policy meeting, consensus is looking for a 60bp hike to 6.00%.
The 60 second overview
European inflation: The European country inflation releases were significantly higher than anticipated, which gives material upside risk to today’s inflation pricing. Spanish inflation rose to 8.5% (from 8.3% in April) and core inflation rose to 4.9% from 4.4% in April while German HICP inflation rose at 8.7% yoy. On a month-on-month term the figures rose markedly, with Germany at 1.1% and Spain at 0.8%. Interestingly, the pace of service inflation declined slightly to 2.9% from 3.2% in April, yet the goods rose markedly by 13.6% up from 12.2% in April in Germany. With the inflation figures set for another record high today, the pressure increases on ECB to tighten its policies – however, we do not believe this will be the case for next week’s ECB meeting to announce a policy rate hike, not least after Lagarde’s de facto rate hike decision last week in the blog post.
Risk appetite continued its generally positive tone in the past days as the COVID-restrictions easing in China gave positive winds to the otherwise relative sour risk sentiment that has prevailed in May. Overnight risk appetite (Asian equity indices) were mixed.
EU summit: At the EU leaders’ summit, it was agreed to ban seaborne oil into the EU, while an exemption for pipeline oil was made. The latter was a compromise particular for Hungary. As a result, oil prices jumped overnight by almost 2% to stand at USD123 per barrel.
Fed: Fed’s Waller was more hawkish than his usual tone and said that he wants 50bp hikes for ‘several meetings’ and argueed for the 50bp size to be the going size until inflation comes down closer to the 2% target.
FI: European curves bear flattened from the start as markets digested the weekend news of easing Covid restrictions in China as well as the inflation prints from Spain, Germany and Belgium all coming in higher than anticipated. US cash markets were closed for Memorial Day.
FX: A weakening of EUR/USD amid newfound stability in equities and rising oil appear well in line with how spot has been priced over the last 1½ years and gives some indication that the recent uptick in EUR/USD is merely a blip and not a new trend, in line with our view.
Credit: Yesterday, credit markets had another strong session and continued in the risk-on mode. CDS indices were both tighter with iTraxx Main 2.4bp lower at 84.4bp, while Xover was 10.3bp lower at 420.5bp. The best performing sector within the IG space was Financials and within the Xover space, Communications and Energy were clear outperformers.