Markets traded with a cautious bias going into the US CPI release, with European equities and the euro incurring modest losses. European yields lost a few bps even as ECB’s Lagarde reiterated that the ECB has further ground to cover. US yields traded mixed going into the release. US inflation in April printed very close to expectations at 0.4% M/M and 4.9% Y/Y for the headline (from 5%) and 0.4% M/M and 5.5% for the core measure (from 5.6%). A 0.4% monthly rise still suggests sticky prices. However, a core measure for services calculated by Bloomberg, stripping out energy and housing, eased to 0.1% M/M and 5.1% Y/Y. At least at this stage, markets apparently saw this mix as soft enough to justify at least a prolonged Fed pause ‘potentially’ to be followed by a first interest rate cut post summer (25 bps discounted for the end September meeting). US yields currently eased between 7 bps (5-y) and 3.0 bps (30-y). The setback in German yields stays more modest at about 4bps across the curve. The easing of core inflation, annex decline in core yields this time supports equities. European indices reversed initial losses (EuroStoxx 50 little changed, S&P opened 0.8% higher). Brent oil tries to regain the $77.5 p/b short term resistance.
Contrary to what was often the case of late, the reaction in FX was al least as significant as what happened in bond and equity markets. EUR/USD just before the release almost touched yesterday’s correction low near 1.094, but revisited the 1.10 barrier (currently 1.0985). DXY still failed to build on a tentative bottoming pattern again trading in the 101.35 area (to be compared with a short term bottom near 100.8). Even the yen gains with USD/JPY immediately after the CPI release tumbling a full big figure (currently 134.65). EUR/JPY also dropped below the 148 handle despite equities rebounding intra-day. Sterling initially remained well bid as UK yields ahead of tomorrow’s BoE meeting. However, EUR/GBP tested the 0.8675 area before trying to build an intra-day bottoming pattern. The National bank of Poland as expected left its policy rate unchanged at 6,75%. No communication has been delivered currently. The zloty already was in excellent shape before the NBP decision and accelerated post the US CPI release. At EUR/PLN 4.52, the zloty trades at the strongest level against the euro since February 2022.
News & Views
Norwegian inflation proves extremely sticky. The headline April number barely eased from 6.5% to 6.4% on a rapid 1.1% monthly pace. Underlying inflation (adjusted for tax changes and excluding energy prices) even accelerated with a monthly 1% jump lifting the yearly figure from 6.2% to 6.3%. Categories registering some of the sharpest price increases were recreation & culture (1.8%), furnishings, household equipment & routine maintenance (1.5% m/m) and housing and utilities (0.8%). Food and non-alcoholic beverages jumped 2.5% m/m. The April outcome not only topped analyst estimates, it was also (way) more than the Norges Bank projected in March (5.6% headline, 6.1% core). It raises serious questions to the Scandinavian central bank’s projected terminal rate of just 3.5% in June. Norwegian swap yields surge between 4.6 and 7.8 bps with the front underperforming. Money markets assume a peak policy rate of 4% at the very least. The Norwegian krone appreciates a tad to EUR/NOK 11.48, testing resistance at 11.50.
Hungarian inflation eased more or less as expected from 25.2% to 24% in April though the monthly dynamics stayed at a strong 0.7%. Core inflation eased as well, from 25.7% to 24.8%. Food prices stabilized in April (0% m/m) and prices of fuels (-0.7%) and electricity, gas and other fuels (-0.8%) even declined month over month. The more sticky services inflation, however, rose by 1.7%. And despite the Hungarian forint’s recent appreciation, tradeable goods prices are still up by about 1% m/m for the fourth month straight. KBC Economics expects inflation to ease sub 20% by July and to moderate to around 13% by September before returning to single digits in December. The Hungarian central bank last month cut the top-end of the interest rate corridor, a move that kicked off the cutting cycle. Barring renewed selling pressure on the forint, the MNB is expected to lower the 18% de facto policy rate (O/N tender rate) already this month (May 23). The currency is testing important resistance around the EUR/HUF 370 recent highs today but that’s at least partially due to a weaker euro (and declining core bond yields).