In focus today
In the euro area, we receive the final euro area inflation data for April. We will especially look out for what drove the still strong service inflation and the measures of domestic inflation as these are key for the monetary policy outlook.
Economic and market news
What happened overnight
In Japan, Kazuo Ueda, Bank of Japan (BoJ) Governor, stated that the central bank has no immediate plan to unload its marked holdings of ETFs, which has garnered increased attention as a potential source of revenue for funding government initiatives. The remarks follow an increasing debate over how the BoJ should manage the legacy of its deflation-ending efforts through extensive money printing, which has left them with a massive balance sheet. However, the central bank has yet to outline a plan for reducing its holdings of ETFs and government bonds, partly due to concerns about destabilizing financial markets.
In China, the monthly batch of data was a mixed bag. Retail sales disappointed falling from 3.1% y/y in March to 2.3% in April (cons: 3.7%). The underlying trend in the level of sales still points to around 5% growth, though. Some consumers may await the trade-in schemes buying new goods for old goods, but it is unclear how much of the scheme is rolled out and how much is in the pipeline since it is up to local governments to implement it. New home prices disappointed as the monthly decline fell to a new cycle low at 0.58% m/m from -0.34% m/m. It broke a trend of smaller declines in previous months. On a more positive note, new home sales continue to show signs of moderate improvement when we look at our own seasonally adjusted series. Sales are hovering around 100 million square metres now after hitting levels below 75 million square metres at the end of 2023. Construction starts also continue to show improvement as social housing projects are increasing. Finally, industrial production surprised to the upside rising from 4.5% y/y to 6.7% y/y (cons: 5.5%). Overall, the data highlights China’s continued muddling through scenario that still relies a lot on government stimulus. Markets showed a muted response with off-shore equities actually slightly higher, adding to recent gains. The CNY has also hardly moved.
What happened yesterday
In the US, April industrial production fell slightly below market expectations, printing at 0.0% m/m SA (cons: 0.1%). Unexpectedly, manufacturing output declined in April by -0.3% m/m SA, driven by a decrease in motor vehicle output, while the March figure was revised down to 0.2%. This aligns with the ISM manufacturing PMI released earlier this month. Additionally, capacity utilization for April edged down to 78.4% SA, 1.2 percentage points below its long-run average (1972-2023).
Initial jobless claims fell by 10k to 222k SA (cons: 220k). This follows last week’s reading of 232k, an eight-month high, fuelled by a surge in applications in New York state tied to school spring break. In general, labour markets are becoming more balanced, but layoffs remain quite low with little signs of rising.
In Norway, Mainland GDP came in at 0.2% q/q in Q1, as expected, and was hinted at by most leading indicators. Hence, growth is currently stronger than what Norges Bank expected in the Monetary Policy Report from March (0.0%). That said, we still see the case for a significant recovery as limited if rates remain at current levels. Therefore, we expect growth to slow down already in Q2, and capacity utilization to remain at subnormal levels. Additionally, the Q1 figures are heavily influenced by seasonality around Easter, making the figures harder to interpret.
The Q2 Expectations Survey from Norges Bank was very much in line with expectations. Inflation expectations for the 12 months ahead were marginally lower, while wage expectations for this year were a tad higher but in line with the results from the central wage negotiations. Interestingly, employers now expect wage growth of 5.2% in 2024, whereas employees expect 4.8%. Additionally, there were no significant changes to the 2Y and 5Y expectations.
In the equity space, the Dow briefly exceeded the 40,000 mark for the first time, though it concluded yesterday’s session somewhat lower. Part of the uptick can be attributed to Walmart, which reported strong Q1 results. Similarly, the S&P 500 and Nasdaq also climbed to intraday highs.
Market movements
FI: There were modest movements in US Treasury bond yields yesterday as the 10Y US yield moved upward a few bp. This morning it has been stable in Asian trading hours. There was more action in the 2Y segment where yields rose almost 10bp. However, the 5% continues to be a top for the 2Y segment and 4.75% for the 10Y segment as the Federal Reserve does not contemplate rate hikes. However, the curve steepener trade continues to struggle when the central banks continue with the”“higher for longer them””. Instead, we like the carry trades such as being long 30Y 5Y Danish callable mortgage bonds as well as being long EU versus France as EU as an issuer is gradually being seen more as a sovereign rather than a supra.
FX: Yesterday’s session was relatively quiet. Much of the post-US CPI movement partially retraced as US yields rose across the curve, led by the front-end. EUR/USD remains in the mid-1.08 to 1.09 range. USD/JPY moved back above 155. The Scandies were the two worst performers in the G10 space, with both EUR/NOK and EUR/SEK trending above 11.60 again. The DKK missed the latest rally in Scandi currencies. Oil prices have stabilized around USD 83-84 per barrel in May.
. Unexpectedly, manufacturing output declined in April by -0.3% m/m SA, driven by a decrease in motor vehicle output, while the March figure was revised down to 0.2%. This aligns with the ISM manufacturing PMI released earlier this month. Additionally, capacity utilization for April edged down to 78.4% SA, 1.2 percentage points below its long-run average (1972-2023).){kind=link}