Friday’s consensus-beating EMU and US PMI’s caught the eye. European figures stressed the growing divergence between weakness in the manufacturing sector and resurging service sector activity. US data pointed to stronger demand conditions which support sharper growth in April and simultaneously bring around renewed inflation momentum. Markets especially responded to US figures given Fed market positioning. Markets discount a final 25 bps rate move by the Fed (as flagged in March dots), but also bet on significant rate cuts before year-end. After PMI’s, they stepped away from the latter idea somewhat. US Treasuries slightly underperformed German Bunds last Friday. US yields closed 3.5 bps to 4.2 bps higher across the curve. German yields increased by 2.6 bps (2-yr) to 4.4 bps (30-yr). Main US and European equity benchmarks gained up to 0.5%. EUR/USD’s attempt to regain the 1.10 figure was blocked by US PMI’s. Any rebound (USD supportive action) didn’t reach further than 1.0950 though. Fresh attacks are highly likely this week while the downside in EU and US yields should be protected ahead of next week’s policy meetings.
News flow is thin this weekend. We retain an FT article with active Belgian ECB member Wunsch. He wouldn’t be surprised if the ECB would have to go to 4%. Before the ECB can think about pausing its policy rate cycle, they need evidence that wage growth and core inflation are coming down. Our base case is for the ECB to deliver another 50 bps rate hike next week with a 4% peak rate likely during summer. Don’t look for that much additional clues on outcomes of next week’s ECB and Fed meetings this week. Fed members are already in their black-out period, with very few ECB policy makers scheduled on monetary-related topics ahead of Wednesday’s Purdah start.
Today’s eco calendar contains German Ifo business sentiment. Decent outcomes are expected after last week’s PMI’s. The Belgian debt agency holds its regular OLO auction. They tap OLO 85 (0.8% Jun2028), OLO 97 (3% Jun2033) and OLO 98 (3.3% Jun2054) for a combined €3-3.5bn. Year-to-Date, the Kingdom already raised €16.41bn in OLO funding compared to a €45bn target. Q1 earnings result from First Republic bank (after market close) are a wildcard for risk sentiment. Later this week, focus turns to US consumer confidence (tomorrow), Q1 GDP readings in the US (Thursday) and Europe (Friday), early national (April) European inflation figures (starting Thursday), PCE deflators (Friday) and the Bank of Japan policy meeting (Friday).
News and views
Rating Agency S&P upwardly revised the outlook on the UK’s AA credit rating from negative to stable as near term negative downside risks have reduced. The stable outlook reflects the UK’s stronger recent economic performance. S&P now predicts only a 0.5% contraction in UK real output this year. It also forecasts more contained budget deficits over the next two years as the UK government’s decision to abandon most of the unfunded budgetary measures proposed in September bolstered the fiscal outlook. S&P takes notice that the government’s energy support scheme has cost significantly less than anticipated because of the fall in energy prices. S&P now forecasts the general government deficit to average 3.7% of GDP over the 2023-25 period compared to 5.5% projected in September last year. S&P expects the government debt to begin declining from a high 97.7% of GDP in 2023.
Moody’s upwardly revised the Irish long term domestic and foreign credit rating to Aa3 from A1. The outlook on the rating was changed from positive to stable. Moody’s said the rating action was driven by a significant improvement of Ireland’s key fiscal and debt metrics and the agency’s expectation that this improvement will be resilient to potential shocks. S&P affirmed the long- and short-term local and foreign currency Greek credit ratings at BB+/B but revised its outlook to positive from stable Amongst others, the agency mentions structural reforms and economic resilience, along with EU support, have improved government finances and financial sector stability. S&P on Friday also affirmed Italy’s BBB rating. The outlook remains stable. The agency expects growth to decelerate in 2023 on the back of high inflation and tightening of credit conditions, before recovering in 2024. It mentions that fiscal consolidation is likely to be gradual and contingent upon growth outcomes or political pressures.