First Republic Bank’s $100bn deposit outflow wacked sentiment at the end of US dealings yesterday as investors relived the turbulent March month. Asian and European trading today suffered from spillover effects with other, mixed earnings unable to provide directional guidance. Core bonds gain. German Bunds outperform relative to US Treasuries at the front end of the curve, perhaps following ECB’s Villeroy post-market comments yesterday. The French governor said more hikes may be needed but they should be limited in time and size. The tone contrasted with the outright hawkish rhetoric by Belgian ECB member Wunsch over the weekend. German yields eased between 2.8 bps (30-y) to 6.6 bps (5-y). US rates declined 3.7 to 5.7 bps across the curve with the 10-y yield slipping further south of the 3.5% support level (June 2022 interim high). The US 2-y yield is hitting support from the 200DMa at around 4.04%. News flow was thin and in any case American inspired. US president Biden officially announced his reelection bid with current VP Kamala Harris as running mate again. At GOP side, former president Trump has a major lead in the polls over his first rival, Florida governor DeSantis. Turning to economic data, the Philly Fed non-manufacturing activity index (from -12.8 to -22.8) fell to the lowest since December 2020. Even labelling it as a second-tier indicator is an overstatement. And yet yields eked out further losses following the release by another 4 to 5 bps. Peripheral spreads vs Germany’s 10y widen slightly, between 1 and 2 bps. Analysts from rating agency Moody’s wrote today that Italy is the only country on its watch list that is at risk of losing its investment-grade creditworthiness. Italy carries a Baa3-rating, one notch above junk, with a negative outlook. An update is due May 19. They said that sluggish Italian growth and higher funding costs may further weaken it’s fiscal position.
FX markets display familiar risk-off correlations. The USD and the JPY outperform peers, cyclicals including the NOK, CAD and AUD lose. DXY (trade-weighted dollar) advances from 101.25 to 101.52 currently. EUR/USD reversed Asian gains to around 1.107 to trade in the low 1.10 area again. USD/JPY keep each other more or less in balance while EUR/JPY, after temporarily hitting a new 9-y high, turned south to 147.48. Sterling slips beyond EUR/GBP 0.8867 and is testing the April low (EUR/GBP-high) after comments from BoE chief economist Pill. He warned for risks of doing too much and said that recent events moderated calls for higher rates. BoE Broadbent earlier today said there are signs wage pressures are easing, though not enough. The Hungarian forint in Central-Europe quickly erased a minor kneejerk move lower after the Hungarian central bank lowered the top-end of the rate corridor by 450 bps to 20.5% – a decision seen as a monetary pivot. Deputy governor Virag hinted at such a move already last week. The forint nevertheless appreciates to EUR/HUF 374.87.
News & Views
The UK Office for National Statistics (ONS) today published the March 2023 government budget data as well as the results for the fiscal year 2022/23. The ONS reported net public sector borrowing (ex. banking) of £21.5 bln in March translating in an estimated full fiscal year borrowing of £139.2 bln, being 5.5% of GDP. This compared to a budget deficit of £121.1 bln (5.2% of GDP) in fiscal year 2021/22. The outcome was less than the latest estimate of the Office for Budget Responsibility (OBR) which expected a deficit of £152.4 bln (6.1% of GDP). However, ONS indicated that the data will revised over the coming months. Public sector net debt at the end of March was £2530.4 Bln or 99.6% of GDP, with the debt-to GDP ratio at levels last seen in the early 1960s. An estimate of the UK public sector net worth showed a deficit of £605.8 bln a further deterioration from last year’s £530 bln. While still substantially worse than the initial estimate, the UK budget data confirm recent data evidence that the UK economy recently probably fared better than assumed a few months ago.
Today, the ECB, Bank of England, Bank of Japan and Swiss National Bank jointly announced to, in consultation with the US Federal Reserve, revert from daily to weekly 7-day operations which will provide liquidity via the standing US dollar liquidity swap line agreement. The new frequency of operations will be effective as of 1 May 2023. The ECB communiqué indicates that the change is the result of the improvements in US dollar funding conditions and the low demand at recent USD liquidity providing operations. However, the ECB and other major central banks stand ready to re-adjust provisions of US dollar liquidity as warranted by market conditions.