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Bond Yields Continue to Decline on the Back of Softer European Inflation Data

Market movers today

On the macro data front, markets will closely follow the French and German flash inflation figures for May following the downside surprise in the Spanish data yesterday.

From the US, the April JOLTs data will be released, where the job openings have been a good leading indicator for wage growth in the past. Consensus is looking for a gradual moderation, although from a still elevated level.

A range of central bank speakers will also be on the wires, including ECB’s Visco and Lagarde as well as the Fed’s Collins, Bowman, Jefferson and Harker.

Overnight, Caixin manufacturing PMI will be released from China.

The 60 second overview

Asian equity markets slides on the back of weaker than expected PMI data out of China. The Chinese manufacturing PMI fell to 48.8 versus the consensus expectation of 49.5. This is the lowest number since December 2022. The non-manufacturing PMI also fell more than expected.

Yesterday, global bond yields and interest rates continued to decline on the back of softer European inflation data from Spain (CPI), Austria (PPI) and Italy (PPI). Furthermore, the Euro area money supply M3 declined as well. On top of the lower inflation from the Euro area, there is also more certainty regarding a deal between the Democrats and Republicans regarding the debt ceiling. This is supportive for the Treasury market and T-bill market, where June T-bills is now back to the levels seen in early May.

Today, there will be more inflation data from the Euro area as we have flash inflation data from Germany and France as well as several other Euro area countries. Inflation is expected to decline, but how fast is the key to the market reaction. In France the expected m/m rise for May is expected to be 0.3% relative to 0.6% m/m in April. For Germany, the expected m/m rise for May is 0.2% relative to 0.4% in April.

The periphery continues to outperform core-EU countries and the 10Y BTPS-Bund spread is back to the 180bp-level. Furthermore, the periphery also outperforms EU bonds and 10Y Portugal (BBB-rated) is now close to be being flat to 10Y EU (Aaa-rated). The Bund ASW-spread remains fairly stable.

In the Scandies the big topic is the continued decline in both SEK and NOK versus the Euro. There seems to be little to stop the slide in both currencies. Today, we have FX transaction data from Norges Bank, and if they lift the FX sale to NOK 1.7-1.8bn per day this is likely to be negative for NOK relative to EUR as we also have lower oil prices combined with the recession/tighter global liquidity narrative.

Equities: Global equities marginally lower yesterday despite the AI euphoria rally continuing. May will end up being a very interesting month with excessively strong gains in tech stocks, while defensive will be lower for the month, unless something unlikely is happening today. Please note, the tech boom in May, and year today is purely driven by multiple expansive. In fact, tech have had the second worst earnings revisions of all sectors and the best performance year to date. Hence, the tech sector is now 40% more expensive base on 2023 earnings estimates than Jan-1st. What’s even more interesting is the tech/growth rally in May has happened alongside increase in interest rates. Hence, the yield driven relationship between value and growth has broken down the past month.

In US yesterday Dow -0.2%, S&P 500 +0.0%, Nasdaq +0.3% and Russell 2000 -0.3%. Asian markets are lower across the board this morning with China once again leading the declines. NBS PMIs this morning weaker than expected with manufacturing sector in contraction territory and service down from the post Covid high last month. Both European and US futures are lower this morning.

FI: Yesterday, global bond yields and interest rates continued to decline on the back of softer inflation data from the Euro area. Furthermore, there is also more certainty about a deal between the democrats and republicans regarding the debt ceiling. This has been supportive for US Treasuries and US T-bills. In the T-bill market, the yield on a June T-bill has declined from 6.5% to 5.30% over the past week.

FX: EUR/USD continues to trade around 1.07. USD/JPY dropped toward and slightly below 140 after the MOF ‘verbal intervention’. Scandies remain under hard pressure with EUR/NOK breaching 12.00 and EUR/SEK at 11.68 this morning.

Credit: Following the public holiday on Monday, supply resumed in the EUR credit market yesterday. In financials, senior deals were launched by SocGen, Sabadell, MUFG, KBC and Bank of Montreal, while SocGen also priced a Tier 2 note. Meanwhile, Credit Agricole became the first non-German name to print a 10Y covered following the SVB collapse and drew solid demand. In the corporate segment Bouygues and ASML were in the market. CDS indices were broadly flat with iTraxx Main at 80bp (unchanged since Friday’s close) and Xover at 427bp (+2bp).

Danske Bank
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