Tue, May 30, 2023 @ 08:08 GMT
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Higher Oil Prices – Lower Yields

Market movers today

The data calendar is light with producer prices in the Euro Area as the potentially most interesting release. PPI inflation should continue its gradual decline driven by energy prices.

Danish FX intervention data for will be published at 17.00 CET, but there is no reason to expect there was any intervention in March.

The 60 second overview

The announcement from OPEC regarding a production cut sending oil prices higher led to several responses from both Federal Reserve members, US Treasury secretary Yellen and several ECB officials – basically it made the job a bit more difficult for the central banks, but more factors than oil determine the inflation path. Furthermore, Yellen stated that the situation around US banks was stabilizing.

10Y US Treasuries ended the day with much lower yields which dropped some 10bp on the back of the weaker than expected ISM data from the US. Late yesterday, another Fed official stated that the disinflationary process has begun but they are not yet there. This morning US Treasuries are more or less unchanged in Asian trading hours.

This morning the Australian Central Bank (RBA) left the monetary policy rate unchanged at 3.60%, in line with consensus expectation and market pricing. The decision to halt rate hikes came on the back of weakening global growth outlook, banking sector uncertainty in the US and Switzerland as well as signs of calming inflation in the February CPI (6.8%; Jan 7.4%).

Equities: Global equities higher yesterday and vol lower. That has been the story for almost 10 days and the reason is still improved confidence in the banking sector. Not because of improved earnings outlook but simply increased certainty that a total meltdown through a systemic bank crisis is avoided. Yesterday the energy sector stood out, increasing more than 4% on the back of the OPEC announcement of output cuts. In the US equities closed mixed with Dow +1.0%, S&P 500 +0.4%, Nasdaq -0.3% and Russell 2000 -0.01%. Asian market are mixed this morning and with tech stocks lower, as it was the case in US yesterday. Futures in Europe are firmer while US futures are a tad lower this morning.

FI: It was a relatively quiet day yesterday until the US ISM number was released which missed estimates and fell to an almost 3y low, which resulted in an initial rally of 5bp in the 10y point in the 10y German to 2.25%, in what was a general curve flattening move. German ASW spreads traded in a tight range yesterday. ECB’s most hawkish GC member Holzmann said that a 50bp hike in May is ‘still on the cards’. While he is the most hawkish member, he also served as a canary in a coal mine for the size of the policy rate hike during the past year, although markets did not react to his comments.

FX: Yesterday’s session was characterised by appreciating currencies related to oil-producing countries on the back of the rising oil price after OPEC+ announced a production cut on Sunday. AUD, CAD and NOK in particular were relative outperformers in the G10 space. Especially the latter significantly outperformed and sent EUR/NOK down to 11.22. The USD initially gained but ended the day broadly weakened sending EUR/USD above 1.09. EUR/CHF ticked higher on yesterday’s lower-than-expected Swiss inflation print. Retreating US yields after weak US manufacturing activity sent USD/JPY below 133.

Credit: The credit markets showed less activity yesterday due to a combination of Easter lull kicking in and investors still trying to figure out if the financial crisis is over before it really got started. ITraxx main closed the day marginally wider at +85.6bp and Xover widened by 7bp to +446bp. In the primary markets NP3 Fastigheter demonstrated that the market for commercial real-estate issuance is still alive, printing a SEK500m High Yield green bond.

Nordic macro

This morning, we published our Nordic Outlook with our forecasts for global and Nordic economies. We expect that higher interest rates and a prolonged period of stagnation or low growth will be necessary to bring down core inflation, unless there is a more severe financial crisis which is not the main scenario. Sweden has both the weakest economy and the highest inflation, and we think the priority will be to fight inflation first. In the other Nordic countries, we also expect some economic weakness, moderately higher unemployment and lower house prices, but the economies show quite a lot of resilience. The Danish current account surplus is expected to remain very large, so we do not see a narrowing of the policy rate differential to the Euro Area over the coming years.

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