Markets
The new leg in the ‘reflation rebound’ as triggered by a promising outcome in US-Sino trade talks last weekend ran into resistance. US yields yesterday were closing in on some kind of a technical wall (2-yr 4.05/10% area, 10-y 4.55/60% area, 30-y key 5.0% barrier). Money markets had scaled back expectations on the EoY Fed easing to 50 bps. The debate for sure will remain subject to multiple reassessments, but for now this look a reasonable bet. While unlikely being conclusive for the timing and amount of Fed easing, mildly softer than expected US data in this respect provided a perfect excuse to move to some more neutral positioning. US PPI producer prices printed softer than expected. April retail sales were soft (0.1% M/M, -0.2% control sales), but came on the back of a very strong (and upwardly revised) March reading. Difficult to draw any conclusions on spending going forward. Idem for mixed industry surveys. Even so, it was enough for markets to not further scale back expectations on Fed easing. US yields eased between 11.3 bps (5-y) and 8.3 bps for the 30-y with the latter intraday briefly touching the 5.0% mark. Even without much high profile news, German yields followed in lockstep with yields easing 6.0 bps (2-y) and 8.0 bps (30-y). EMU money markets are now again fully in line with two additional ECB rate cuts towards the end of the year and a low in the ECB easing cycle at 1.75%. The equity rally stalled but with no retracement yet (S&P 500 +0.4%, Eurostoxx 50 +0.16%). USD trading of late mainly was driven by trade-related topics (was/is FX policy a topic in US trade negotiations, in particular with Asian trading partners?). Even so, yesterday’s US data and declining yields at least didn’t help. The dollar eased a bit further with the likes of the won and the yen still outperforming (close USD/JPY 145.7, DXY 100.88, EUR/USD marginally higher at 1.119). Decent UK GDP data kept sterling fairly well bid intraday, with EUR/GBP returning tot the low 0.84 support area.
Asian equities this morning trade modestly lower. US yields tentatively extend yesterday’s setback (minus 1-2 bps) as does the dollar (USD/JPY 145.2, EUR/USD 1.1215). Today’s eco calendar in the EMU is almost empty. In the US housing starts and permits and the U. of Michigan consumer confidence are scheduled for release. Confidence is expected to bottom after a steep setback since the start of the year. Markets will look out for the inflation expectations series after last month’s sharp leap higher, especially in the 1-yr ahead measure (6.5%). Given the repositioning this week, probably a substantial upward surprise is need for yields to change course north again. For now, we favour more consolidation as US yields are probably blocked by above-mentioned technical barriers. The dollar rebound earlier this week apparently has run its course. Especially for the likes of USD/JPY, direction south looks the path of least resistance.
News & Views
Japanese GDP shrank by slightly more than expected in Q1 2025. The -0.2% Q/Q contraction (-0.7% annualized) was the first negative number since Q1 2024. Available details showed consumption failing to contribute (0% Q/Q) following an already weak Q4 2024 (+0.1% Q/Q). Like in yesterday’s UK GDP release, there was a significant increase in business spending (1.4% Q/Q). Net exports cut 0.8 percentage point off Q/Q GDP with inventories adding 0.3 ppt. Rather weak growth was accompanied by rising inflation with the GDP deflator increasing from 2.9% Y/Y to 3.3% Y/Y, the highest levels since Q4 2023, and complicating the BoJ’s policy normalization process. Japanese money markets aren’t positioned for the continuation of the hiking cycle anytime soon, with the market implied probably of another 25 bps rate increase at only 67% by the end of the year.
The central bank of Mexico extended its rate cut cycle with a third consecutive 50 bps rate cut to 8.50%. Banxico stated that “it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” This clearly hints at similar action at the June meeting. Both headline and core inflation came in at 3.93% Y/Y in April. Inflation forecasts were adjusted upwards in the short term, mainly due to a greater-than-expected increase in merchandise inflation but headline inflation is still expected to converge to the 3%-target in Q3 2026. Although the balance of risks remains biased to the upside, it has improved as global shocks have been fading. The inflation environment allows for a continuation of the rate cutting cycle, albeit maintaining a restrictive stance.
