Markets
We got the first national inflation releases today in the run-up to the European figure on Thursday. Belgian (non-harmonized) inflation decelerated from 5.6% in April to 5.2% in May (see below). The Spanish number came in below consensus with HICP easing from 3.8% to 2.9% vs the 3.3% expected. Monthly prices unexpectedly dropped 0.2% amid a fall in fuel prices and a smaller food price gain. Core CPI (national reading) slowed from 6.6% to 6.1% vs 6.4% consensus. Germany, France and Italy are all due tomorrow and make up some 65% of the HICP basket. The Spanish number nevertheless set the tone for core bonds today. It also preceded the ECB’s monthly monetary development publication, showing the annual M3 money growth further decelerated from 2.5% in March to 1.9% in April. This suggests ECB tightening is continuing to filter through. The combination pushes European yields further south. German yields extend yesterday’s 10 bps decline with another 2.4-6 bps move across the curve. The 2-y yield (2.82%) backs away from the 3% barrier. ECB’s Simkus was the latest one to back at least two more 25 bps hikes this year. September is an open question and there is still a lot of economic data to be published as well with two more forecasting rounds to be held. US Treasuries give up 1.2-5 bps. Losses were double that before US investors started joining though. The 2-y reference still holds above 4.50% though. UK gilt yields gapped lower at the open but recovered most of the losses as trading evolved. Such underperformance, once again, this time around did not go unnoticed on FX markets. Sterling was pouncing on the YtD highs against the euro for some time now. EUR/GBP 0.865 support (resistance for the pound) eventually broke. The pair is now trading at its weakest level (0.863) since mid-December. EUR/USD (1.073) briefly dipped sub 1.07 to 1.068 before a technical bounce-back brought it back north of that big figure. The trade-weighted dollar eases a few ticks to the recently conquered 104.089 resistance-now-support. USD/JPY initially extended a streak of gains to 140.93 before reports of an unscheduled meeting between officials from the BoJ, Ministry of Finance and the Financial Services Agency aired. Investors took it as a sign that officials are on alert regarding the weakening JPY. Losses turned into gains with USD/JPY changing hands around 139.81. Stocks fluctuate in Europe and open with gains on WS (+1% for the Nasdaq).
News & Views
Swedish GDP rose by 0.6% Q/Q in the first quarter of this year (0.8% Y/Y), beating the 0.2% Q/Q consensus estimate. The upturn is mainly explained by an increase in inventories (+0.6 ppt contribution) and by a strong growth in the export of goods (+1.2% Q/Q vs +0.7% Q/Q for imports; +0.3 ppt contribution). General government consumption and gross fixed capital formation both grew by 0.5% Q/Q. Household consumption was the only drag on growth, falling by 1.2% Q/Q. The total number of employed persons increased by 0.7% with the number of hours worked rising by 1.8%. Monthly confidence data (May) released today also beat consensus. Today’s figures don’t stop the rot in the Swedish krone which weakens to a new multiyear low at EUR/SEK 11.63. Pressure builds for the Riksbank who recently started talking up earlier guidance that a final 25 bps rate hike from the current 3.5% would suffice. Deputy governor Jansson today said that sooner or later, the weak currency will become an important factor for inflation and that it would cause a problem for monetary policy. Governor Breman last week floated divesting more bonds as a policy option in addition to higher rates. Currency interventions should be seen as a last resort according to Jansson.
Belgian inflation rose by 0.38% M/M in May. The most significant price increases in May were registered for the maintenance and repair of cars (+4.3% M/M), plane tickets (+18.3%), private rents (+0.9%), holiday villages (+10.1%), French-fries stands, fast-food restaurants and snack bars (+4.1%), hotel rooms (+7%) and alcoholic beverages (+2.5%). Motor fuels (-4%), electricity (-4.4%), bread and cereals (-1.4%) and domestic heating oil (-2.7%) had a decreasing effect on the index. In Y/Y terms, Belgian inflation slowed from 5.6% to 5.2% because of sharply falling energy prices (-21.98% Y/Y). Underlying core inflation, stripping out energy and unprocessed food prices, rose from 8.28% Y/Y to 8.9% Y/Y. Services inflation showed a strong acceleration from 6.8% Y/Y to 8.16% Y/Y with inflation from rents stable at 6.23% Y/Y.
