Sunset Market Commentary

Markets

After yesterday’s minimal US CPI undershoot, attention for today’s March PPI release was perhaps slightly bigger than usual, if only because there was little other news hitting the wires. All three gauges again printed sub-consensus with the biggest miss for the headline figure (-0.5% m/m and 2.7% y/y vs 0.0% and 3% expected). The February reading was revised upwards a bit. US weekly jobless claims came in close to expectations at 239k (235k expected). Continuing claims eased from 1823k to 1810k, making it the fourth week straight to register a 1800k+ number. That hasn’t been the case since end 2021. Usually considered second tier, the data this time around do trigger yet another core bond yield intraday reversal. US rates swapped 3 bps gains at the front for losses after today’s data. Current changes vary between -5.4 bs (2-y) to -0.7 bps (30-y). Money markets in the area are close in pricing in a full percentage rate cuts from an expected 5-5.25% terminal rate by January 2024. German yields quickly erased opening losses but their move higher ran into resistance near the 50dMA’s – which coincide with the March correction highs – before joining US yields south again. Declines in the 2y5y sector mount to 3.4-3.8 bps. The slight Bund underperformance follows German and Belgian ECB members Nagel and Wunsch reiterating the need to do more on inflation. Wunsch said there’s a strong consensus to do so and kept both options of a 25 and 50 bps May hike firmly on the table. Much depends on the April inflation reading, which is published two days before the May 4 policy meeting.

The core bond yield decline lifts equity spirits. The Euro Stoxx 50 advances 0.40% and is on track for the highest close since the beginning of 2022. The post-pandemic high is a mere 1.5% away. WS opens with 0.1-0.9% gains. That’s giving EUR/USD the push it needed to surpass the symbolic 1.10 barrier. At 1.105, the pair is currently even extensively challenging the previous YtD high of 1.1033. We still have tomorrow’s US retail sales and consumer confidence due, but if the break is confirmed at the end of the week, we’re looking at EUR/USD 1.1185 as the next meaningful resistance area. The mirror image for the trade-weighted DXY (100.92) consists of losing 100.82 support (current YtD low) before returning to the 99.4 area. EUR/GBP simply followed the EUR/USD pair higher, appreciating from 0.8804 to 0.8822.

News & Views

Czech March inflation printed in line with market consensus. Monthly dynamics slowed from 0.4% to 0.1% with the annual figure sliding from 16.7% to 15%, the “slowest” pace since April of last year. The March inflation figure was 0.2 percentage point higher than expected in the Czech National Bank’s winter forecast. This was due mainly to substantially faster growth in food prices (17.7% Y/Y). Core inflation (11.5% Y/Y) and fuel prices (-17.6% Y/Y) were broadly in line with the forecast. Growth in prices of goods and services slowed and the contribution of the cost of owner-occupied housing in the form of imputed rent decreased further. The CNB expects inflation to fall below 10% Y/Y in the second half of the year. By early 2024, they expect both headline and monetary-relevant inflation (currently 15% Y/Y) to decline to close to the 2% target. Czech swap yields rise by 9 bps (10-yr) to 12.5 bps (2-yr). Apart from the CNB forecast beating CPI, there were comments by CNB Prochazka who said that Czech rates may rise if the job market stays overheated and that the central bank certainly won’t cut rates too soon. The Czech koruna rallies to a new multiyear high against the euro below 23.30.

The Bank of England published its quarterly credit conditions survey (Q1 2023). Lenders reported that the availability of secured credit to households was unchanged in the three months to end-February 2023 (Q1), but they expect availability to decrease over the next three months to end-May 2023 (Q2). Demand for secured lending for house purchase decreased in Q1, but was expected to increase in Q2. Lenders reported that default rates on secured loans to households increased in Q1, and were expected to increase further in Q2. Losses given default on secured loans increased in Q1, and were also expected to increase further in Q2.