Sunset Market Commentary

Markets

European stock opened around 1.5% weaker this morning, catching up with losses inflicted on WS’s benchmark indices last night and Asian bourses this morning by Israel’s lingering treat to strike back against Iran. The EuroStoxx 50 tested the 50d moving average at the start (4910), but avoided a technical drop at first. Going into US dealings, risk sentiment is again deteriorating. Losses currently amount to maximum 2%. US equities are off to a mixed start. First support in Nasdaq at 15862 narrowly survives for now. We err on the side of a larger correction though on a combination of higher real rates, geopolitical risk and the Q1 earnings season. Core bonds extend their slide as markets continue to push back against rate cut bets. In Europe, a new consensus is gradually building around a quarterly 25 bps rate cut pace, bringing the deposit rate at 3.25% by year-end. We warned before that a bumpy H2 2024 inflation path, economic green shoots and the Fed delay will make it hard for the ECB to make monetary policy less restrictive after an inaugural move at the June meeting. ECB Rehn and Makhlouf both warned that geopolitics are the biggest treat to this scenario eg via a complete closure of the Res Sea. In the US, money markets are now even doubting whether the Fed will be able to implement two rate cuts this year, with markets rallying around September to pull the trigger. Fed vice-chair Jefferson added to the sell-off by warning to hold rates high for longer if inflation persists. He still thinks that inflation will decline given a steady policy rate, shutting the door on Fed rate hike talk. Q1 GDP growth will slow from Q4 but remain solid and the labor market stays strong. Disappointing US housing data only temporary came to US Treasuries’ rescue intraday. US housing starts fell by 14.7% M/M after a 12.7% surge in February with both single family and multifamily starts being affected. Building permits were 4.3% lower on the month, especially for single family permits. US yields currently add 4.5 bps (2-yr) to 7.4 bps (30-yr). The US 10-yr yield set a new YTD high at 4.68% and the 30-yr tenor did the same at 4.80%. Daily changes on the German yield curve range between +0.1 bp (2-yr) and +3 bps (30-yr). King dollar ran out of steam after an impressive >2% gain over the past 4 trading sessions. EUR/USD moves away from the 1.06 big figure to currently change hands around 1.0630. Several emerging market currencies remain extremely vulnerable though with USD/BRL today extending its surge to its highest level in over a year. USD/KRW is another point in case with the pair testing the 1400 mark which in the recent past was only broken during the GFC and the pandemic. EUR/GBP (0.8540) wasn’t bothered by this morning’s weak labour market data with accelerating wages making the picture somewhat diffuse.

News & Views

Canadian March inflation printed slightly softer than expected. Headline inflation rose 0.6% M/M (vs. 0.7% consensus) and 2.9% Y/Y from 2.8%. Core inflation measures slowed more than expected, printing at 2.8% from 3% for core median and 3.1% from 3.2% for core mean. In a monthly perspective, price rises were driven by shelter (0.4%), clothing and footwear (2.9%), gasoline (4.9%) and recreation and education (0.5%). Prices for health and personal care (-0.1%) and household operations contributed negatively to inflation. At its policy meeting last week, the BoC expected inflation to be close to 3% in H1 this year, before easing to 2.5.% in H2 and retuning to 2% next year. Markets see a 65% chance of a first BoC rate cut at the next meeting (June 05) with a 25 bps step (more than) fully discounted for July. The loonie traded in the defensive against a broadly strong dollar of late and lost further after the softer than expected March CPI .USD/CAD touched a new YtD top near 1.382 today.

The National Bank of Poland published its monthly calculations for core inflation. March headline inflation was published by the statistical office yesterday at 0.2% M/M and 2% Y/Y. All core measures slowed substantially. CPI excluding food and energy eased from 5.4% Y/Y to 4.5%. The index net of volatile components amount to 3.4% from 4.5%. Inflation excluding administered prices slowed to 1.8% from 2.8%. Most MPC members including governor Glapinski indicated little room to cut the policy rate this year despite inflation printing below the 2.5% NBP target. Prices might reaccelerate later on higher VAT and the government scaling back (some of) the anti-inflation measures (caps on energy prices). After trading near the strongest levels since early 2020, less favourable global sentiment triggered a correction with EUR/PLN now trading near 4.343 compared to a low near EUR/PLN 4.253 last week.