Focus Turns to PMI Data

Market movers today

Today, focus turns to March flash PMIs from Europe and the US. Activity is expected to moderate in service sector as the boost from pent-up demand continues to fade, while manufacturing momentum is set to continue its recovery in Europe while the US index is expected to take a small hit lower. Data for the indices has been collected mid-month so we are curious to see whether the recent turmoil has affected the respondents’ sentiment.

In Sweden, PPI data is usually not a market mover but given the heightened attention to inflation developments due to high and soaring food prices in Sweden it may be interesting to look at the leading food price information that is in the PPI domestic supply prices.

In the US, we will also get preliminary durable goods orders for February.

On the speaker list, we have Fed’s Bullard and the ECB’s de Cos, Nagel and Centeno.

The 60 second overview

Market recap: US bond yields drifted lower yesterday, a move that has continued in Asian trading. EUR/USD also declined while equity markets are broadly flat from yesterday.

High core CPI out of Japan, PMI improves: Japanese CPI released overnight showed a decline in inflation in March to 3.3% from 4.3% in February in line with expectations. It was partly due to energy subsidies, though, and core inflation increased more than expected to 3.5% y/y (consensus 3.4% y/y) from 3.2% y/y in February. Japanese flash PMI manufacturing for March increased to 48.6 from 47.7, thus showing tentative signs of a bottom.

US emergency lending picked up: The latest weekly data suggests that the use of Fed’s new Bank Term Funding Program (BTFP) picked up during its first full week of operation to USD53.7bn (from USD11.9bn during the first three days). That said, the rise was partially compensated by lower use of the discount window, which fell to USD110.2bn (from USD152.9bn). Active use of both Fed’s emergency lending facilities suggests that Fed has been able to successfully support banks’ liquidity situation, and while total bank reserves declined by USD74bn, they remain near the highest levels since last spring. Yesterday, Yellen also emphasized that regulators are prepared to take further action to protect deposits if needed, even if a broader ‘blanket’ insurance is off the table.

China urges Europe to support peace talks: China’s top diplomat Wang Yi urged European nations to “play their due role” in peace talks and support a ceasefire. More nations are entering the arena of peace talks as Spain’s Prime Minister, Pedro Sanchez, announced he would be travelling to Beijing next week to speak to China’s President Xi Jinping about the peace proposal, Brazil’s President Lula will begin a five-day visit to Beijing on Sunday and French President Emmanuel Macron said he would visit Beijing in early April. The US is against a ceasefire as it would freeze the conflict at current lines and believes the peace proposal is biased towards Russia. Reports of Xi going to talk to Ukraine’s President Zelensky soon has not yet been confirmed by either side.

Flurry of central bank meetings yesterday: Bank of England (BoE) hiked the policy rate by 25bp to 4.25% as expected. Although they left little guidance, we have pencilled in another 25bp hike for the May meeting as we do not expect data to weaken enough for the BoE to pause the hiking cycle, see Bank of England Review – Set for another 25bp hike in May, 23 March. Norges Bank (NB) also lifted rates by 25bp to 3.0% as widely expected but the forward guidance was clearly to the more hawkish side of expectations. NB guided towards two additional 25bp hikes in Q2 with emphasis on the next hike coming already at the interim meeting in May. Finally, the Swiss National Bank (SNB) hike rates by 50bp taking the policy rate to 1.5%. The SNB left a hawkish message as they now see inflation as more broad-based and continue to echo that they cannot rule out further increases in the policy rate.

Macro data: US initial jobless claims continue to point to a very tight US labour market as they stayed at a low level this week at 191k, broadly flat from last week’s 192k. US new home sales increased for the third month in a row to 640.000 from 633.000 (annualised) and while still at a low level, they add to other evidence that the housing market is bottoming out. Euro consumer confidence yesterday showed a small decline in March from -19.1 to -19.2, breaking a five-month streak of increases. It is still at a quite low level signalling little improvement in private consumption.

Equities: US equities rebounded on Thursday, but came off its highs in a volatile session. Similarly, Europe started at a muted setting but improved at the US opening bell. S&P 500 closed up 0.3% and Nasdaq 1% as growth stocks dominated the show since Fed pivot hopes are alive and kicking in markets. Tech outperformed banks by 3p.p. which traded broadly lower for a second day. Most value sectors underperformed, including energy and real estate. Futures are higher this morning.

Credit: Despite the recovery in AT1 spreads seen this week, spreads are still at wide levels following Credit Suisse’s CHF16bn stack being written down to zero, which is having ramifications for extension risk. Yesterday Pbb indicated that it would not be exercising its AT1 call in April and other calls are coming up including notably the EUR1.25bn Unicredit AT1 with call in June. Hence, the AT1 segment may not be out of the woods yet. In contrast, the IG corporate bond market was reopened yesterday with Volkswagen placing a well-subscribed green EUR dual-tranche. CDS indices were slightly wider yesterday with iTraxx Main closing at 95bp (+4bp) and Xover at 488bp (+18bp).

FI: Global bond yields continue to decline as 10Y Bunds fell some 13bp to 2.18%, while 10Y Treasuries ended a very volatile day at 3.43% after having been as high at 3.5% before declining to 3.38%. The curves steepened from the short end as 2Y German govt yield declined 18bp, while 2Y Treasuries fell 10bp. Hence, we are seeing the traditional pattern on the US curve as we get closer to the end of the hiking cycle, where the curve begins to steepen ahead of the first rate cut. Given the high correlation between the US curve and core-EU curves, European yield curves follow the US curve even though we still expect ECB to move to 4%.

FX: JPY and NOK were among the winners in G10 FX space yesterday. The former helped by a further drop in US bond yields and the latter by a hawkish Norges Bank that looks far from done raising interest rates. EUR/USD held above 1.08.

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