Markets
Europe took a slow start to the new week. Core bonds struggled to find direction in a session where news and data was scarce. As trading evolved, core bonds eventually extended Friday’s losses with US Treasuries underperforming German Bunds already before the release of a better-than-expected Empire Manufacturing. The April headline index rebounded sharply from -24.6 to 10.8 (vs -18 consensus), the highest since July and the first positive reading in five months. New orders surged by a record 46.8 points to 25.1. Actual shipments also shot up by a whopping 37.4 points. Headcount is still expected to shrink though less than in March. Prices paid eased from 41.9 to 33 signaling easing producer prices though prices received edged up to 23.9. Business conditions for the six month ahead period improved as well but remain low in a historical perspective. US yields add between 4 and 6.1 bps with the front end of the curve taking the lead higher. German yields advance 2 bps (2-y) to 4.1 bps (30-y). Core bond yields further bottoming out suggests markets are (getting) past the mid-March financial turmoil and instead embrace the idea of more central bank tightening to come. Current market pricing implies an >80% chance of a 25 bps Fed rate hike in May. Euro area money markets expect an additional 75 bps more tightening to come. There’s a 25% odd for a 50 bps move in May but it’s building after last week’s (orchestrated?) verbal intervention by the likes of ECB Wunsch. Equities in Europe have come a bit under pressure after an impressive rally over the past month. The EuroStoxx50 touched the 4K barrier mid-March and tested the 4400 level end of last week and again today. Failure in pushing through resulted in a muted technical countermove with the index losing 0.5% currently. WS opens mixed. Equities losing some steam and USTs underperforming are giving the dollar an edge. DXY rises from 101.57 to 101.83 and EUR/USD slips from 1.10 at the open to 1.0955 now. USD/JPY extends gains to 134.18 within a developing shallow upward sloping trend channel. EUR/JPY briefly hit the highest level since end-October before paring gains to just south of 147. Sterling strengthens despite the fragile risk mood and gilt outperformance (yields gain less than 2 bps). EUR/GBP loses half a big figure intraday, dropping from a 0.8872 high to 0.8825 currently.
News & Views
The Swedish government published its 2023 spring fiscal policy bill and the spring amending budget for 2023. The government assesses the Swedish economy to be in recession throughout 2023. It downwardly revised its 2023 growth forecast from -0.7% to -1.0%. At the same time, headline inflation/CPIF is expected at 8.8% and 5.9% respectively, marginally lower from the December forecasts with inflation driven primarily by higher prices of food and services, whereas the impact of energy prices is decreasing. Underlying inflation (ex. interest costs and energy) is expected at 6.6% this year. Public finances are to be impacted negatively by declining demand in the economy in the coming years but the fiscal situation stays robust with government debt at a historically low level (31.0% of GDP expected in 2023 & 2024). In this context, the government says it is exercising responsibility through continued restrain in its fiscal policy while ensuring support goes primarily to vulnerable households. The krone is strengthening modestly today. Still, at EUR/SEK 11.34, the Swedish currency is holding within reach of the post-pandemic lows (EUR/SEK 11.44/48) as the Riksbank takes a rather balanced anti-inflation approach.
According to data released by the National Bank of Poland today, core inflation in the country rose 1.3% M/M and 12.3% Y/Y (was 1.3% M/M and 12.0% Y/Y in February). CPI prices excluding food and energy prices and excluding administered prices still rose 1.3% M/M. Most volatile prices rose 1.5%. Earlier this month, the statistical office reported headline March inflation at 1.1% M/M and 16.1% Y/Y. The NBP has a 2.5% inflation target with a tolerance band of +/- 1.0%. In a written response to questions from Reuters, Polish MPC member Cezary Kochalski before today’s data release indicated that high inflation is leaving no scope for the NBP to discuss interest rate cuts. For that to happen it needs certainty ‘that inflation is moving quickly to the target over the monetary policy impact horizon’. The zloty YTD underperformed the forint and the Czech koruna. However, EUR/PLN (4.63) is now also closing in on 4.6270 support (December low).
