Markets
US and UK markets reopened yesterday after long weekend, allowing room for some repositioning to Monday’s bond and stock rally on enthusiasm on a US-Iran deal. European bond markets underperformed with curves bear steepening on the back of ECB comments. ECB board member Schnabel backs a June rate hike even with a peace deal in place by then. She especially stresses the persistence of the shock which lasts longer than the ECB’s adverse scenario from March. Schabel’s interview – “a large an persistent shock”- is the first thing you when opening the ECB’s website. An interview by chief economist Lane, also published yesterday, was less outspoken. Like ECB President Lagarde over the weekend, he hinted at upward revision to inflation forecasts. He also added that the central bank expects indirect effects beyond energy prices in what could also be considered as a hint toward more imminent policy action. The market implied probability of June action ticked up yesterday in lockstep with front-end yields, hitting 90%. A speech by ECB President Lagarde and minutes of the April ECB meeting (on which a rate hike was discussed) could offer more clues tomorrow. Eco data were yesterday limited to May US Conference Board consumer confidence which edged downward (93.1 from 93.8) as the inflationary impacts of the war in the Middle East intensified. Consumer appraisals of current business conditions and the current labor market were moderately less positive and outweighed modest improvements in consumers’ expectations six months from now. Consumers’ average and median 12-month inflation expectations ticked downward but remained elevated at respectively more than 6% and more than 5%. Markets didn’t respond to the release. Overall, trading developed in an orderly way as Brent crude for most of the day managed to hold (just) below the $100/b mark. On US stock markets, a huge outperformance of Micron helped the Nasdaq to a 1.2% gain and a minor intraday all-time high. The dollar is going nowhere, holding between EUR/USD 1.16 and 1.1650. Today’s eco calendar is thin, suggesting any Iran-related headlines will drive intraday price action.
News & Views
The Reserve Bank of New Zealand (RBNZ) left its policy rate unchanged at 2.25% as widely expected. However, the decision was a very close call. Three members preferred to raise the policy rate by 25 bps. Three other members voted to still keep policy unchanged. Governor Breman was in the unchanged camp and casted the decisive vote. The MPC assesses that inflation will probably rise to 4.3% in the September quarter from 3.1% in Q1. This rise in in inflation occurs even as economic activity and spending is weakening. For some firms, rising costs are squeezing profit margins and curbing investment and hiring intentions. Consumer confidence has fallen sharply, and the housing market remains weak. Even as weak activity is seen dampening inflationary pressures in the medium term, the MPC concludes that the OCR will most likely need to increase sooner and by more than envisaged in February. Data in the new monetary policy statement suggest that the policy rate might average 2.5% in Q3, 3.1% next year to reach 3.3% at the end of the policy horizon. The RBNZ predicts growth stabilizing in Q2 followed by a modest 0.2% in Q3. They forecast average growth for this and next year at 0.7% and 1.7% respectively. The New Zealand 2-y government yield adds 4.5 bps to 3.54%. Money markets discount an 80% probability of a July rate hike. The kiwi dollar rises from the NZD/USD 0.584 area to currently trade near 0.5875.
Australian April CPI inflation data this morning showed a mixed picture. Headline inflation printed at 0.4% M/M and 4.2% Y/Y, down from 4.6% in March. However, trimmed mean annual inflation rose further to 3.4% from 3.3% in March. Of the 11 groups in the CPI, 7 have experienced a slowdown in annual growth from last month with transport prices moderating the most. Automotive fuel prices declined 7% M/M, as this fall includes a halving of the fuel exercise duty on April. The statistics agency assesses that the impact of higher oil prices filtered through to products and services with high freight and logistics costs. Annual housing inflation was 6.3% in the 12 months to April. This reflects rising costs for electricity, new dwellings and rents. The 2-y government bond yield eases slightly this morning (-5 bps to 4.54%). Markets attach an 80% to the scenario where the RBA still raises the policy rate by an additional 25 bps by year-end. The Aussie dollar eases marginally this morning (AUD/USD 0.715).
