Markets
Core bond yields yesterday staged a further (forceful) bear steepening heading into the Fed, BoC, BoE and ECB policy meetings scheduled today and tomorrow. Markets are growing ever more convinced that a prolonged stalemate in the US-Iran conflict, including blockage of the Strait of Hormuz, will inevitably have lasting consequences for multiple supply chains. Most recent communication from the parties involved suggests that both of them consider themselves to be in a position not to be forced into concessions. In this respect, the WSJ reported that US President Trump told aides to prepare for an extended blockade of Hormuz. Brent oil ‘settles’ north of $110/b. The UAE announcing to leave the OPEC cartel didn’t help much. Turning to Europe, the ECB’s consumer expectations survey (March) showed citizens preparing/fearing a new, sharp and extended rise in global price levels. Inflation expectations for the next 12 months jumped from 2.5% to 4%. Three year ahead expectations also rose way more than expected to 3%. Combined with a strong stagflation message from last week’s PMI’s, this for sure won’t pass unnoticed at the ECB as it prepares the communication on its reaction function at tomorrow’s policy meeting. German yields added between 7.8 bps (2-y) and 1.2 bps (30-y). Consecutive steps in June (100%) and July (75%) are now seen as highly likely as is a third one by year-end. The ‘extreme’ positioning of end March/early April is again within reach. US pricing again was more modest with the 2-y adding 3.9 bps and the 30-y ceding 1.2 bps. The BoE is also under pressure to give a clear anti-inflationary commitment with the 10-y gilt yield surpassing 5%. The direct spill-over to other markets again was modest/orderly. Equities in the US lost up to 0.9% (Nasdaq). The Eurostoxx 50 ceded 0.41%.The dollar also profited only modestly from the oil ascent (DXY 98.64; EUR/USD 1.171). The yen underperformed as the BoJ failed to give a hard commitment on further policy normalization (USD/JPY 159.6).
Despite the turbulent global context, the Fed is widely expected to stick to a (modestly hawkish) hold today. Labour market and other US activity data over the previous six weeks were strong enough for the Fed to reconfirm that they can hold the policy rate at a tentatively restrictive level for some time to come. The main focus at the press conference probably will go to whether Powell will stay in the FOMC after his term as Fed chair ends mid-May. In Europe, the focus will stay on the next batch of (April) national inflation data (Spain, Germany, Belgium) as the impact of the conflict in the Middle East is filtering through to end prices. Even if this pass-through to official CPI data might be a bit different/delayed across individual countries, the trend probably won’t provide much comfort for ECB policymakers. We assume little market correction on the recent rebound in (European) yields as long as the stalemate in the Middle East persists and oil holds near current (or higher) levels. For (US) equities, Q1 earnings from bellwethers (Alphabet, Microsoft, Meta Platforms and Amazon) should ‘justify’ the recent tech rally.
News & Views
Australian CPI in Q1 accelerated to a consensus-matching 1.4% Q/Q and 4.1% Y/Y well above the RBA 2-3% target band. Core measures came in close to expectations, varying between 3.3% and 3.5%. The monthly March print showed a material quickening to 1.1% m/m (flat in Febr) reflecting the initial energy impact of the Iran war. The quarterly print, however, was only slightly higher than the RBA’s February projection, prior to the Middle East conflict. While much of the impact is probably yet to come, markets were bracing for a bigger inflationary shock already. It’s causing a bull steepening move in the Australian swap yield curve with changes amounting to up to -11 bps at the front end. The market implied probability for a third consecutive rate hike in May fell from around 80% to less than 70%. AUD/USD is trading around 0.716 compared to the multiyear highs of 0.72 in the days before.
Hungary’s incoming prime minister Magyar and the European Commission are negotiating to salvage some €10bn in pandemic funding that would otherwise be lost beyond an August deadline. The money is part of a total of more than €20bn in frozen resources over rule of law concerns during the Orban administration. Hungary would need to implement a slew of anti-corruption measures and judicial independence in order to regain access. That can happen fairly quickly because of Tisza’s supermajority. But for the €10bn in focus, the country also needs to present shovel-ready projects in a rewritten Recovery and Resilience Plan to claim the money. The remaining three months to do so is very tight. Some of the options being discussed include bringing forward projects currently allocated to other European programs with more distant expiry dates, Bloomberg reported citing an official, or use some of the available funds to increase the capital of its state investment bank, similar to what for example Spain has done. Those steps would salvage the funding while letting it be spent over a longer period of time.
 hold today. Labour market and other US activity data over the previous six weeks were strong enough for the Fed to reconfirm that they can hold the policy rate at a tentatively restrictive level for some time to come.){kind=link}