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Markets

Markets took a slow start to the new trading week. An empty eco calendar facilitated the status quo. Cleveland Fed Mester said that inflation risks moved up in Q1 while the economy was a little bit stronger than anticipated. Given that she wasn’t on the median path (3 rate cuts) in March, she might back only one at the June meeting. The relevance is low though given that she’ll retire at the end of June. Core bond yields moved a little further away from last week’s tested support levels, but the move lacked momentum. US Treasuries slightly underperformed German Bunds with daily yield increases varying up to +2.5 bps in the US and +1.5 bps in Europe. Similar story for the dollar which closed marginally stronger at 104.56 (DXY) and 1.0857 (EUR/USD). US stock markets showed a diverging pattern near all-time highs with the Dow Jones correcting 0.5%, S&P 500 unchanged and Nasdaq still gaining 0.65%.

Eco releases remain second tier today, but the number of central bank speakers increases with especially Fed Waller discussing the US economy. Waller was one of the first and most prominent (rumoured candidate as next Fed chair) Fed-members to talk out in favour of keeping rates higher for longer. His February “what’s the rush” and March “there’s still no rush” speeches are testament to his views and together with hotter CPI prints kick-started this year’s Treasury sell-off. His views are a good indication (and potential market mover) on how the dots might shift at the June policy meeting given his standing a “leader” of the large minority camp (9/19) which suggested only a maximum of two policy rate cuts in 2024 at the March meeting. Bank of England Chair Bailey speaks as well which could influence the probability of a first rate cut at the next, June, meeting (currently 50% probability).

The eco calendar heats up later this week with May UK CPI data and FOMC Minutes tomorrow, global PMI surveys (May) and the outcome of Q1 negotiated wage data (EMU) on Thursday and finally UK retail sales (May) and US durable goods orders (April) on Friday.

News & Views

Czech National Bank (CNB) MPC member Tomas Holub indicated that he still considers it too early to already decide whether the pace of CNB rate cuts should be slowed from 50 bps at the previous three meetings to 25 bps at the June meeting. Holub first wants to see the May inflation data that are published before the June 27 meeting. Inflation unexpectedly jumped from 2% to 2.9% in April, but this was mainly due to a rise in volatile food prices. Aside from the development in headline in inflation, Holub also said he keeps a close eye on the development of Czech krone. Regarding domestic developments, he mentions wages as a key variable. Faster than expected wage rises could be an argument to slow the pace of rate cuts. Looking forward, Holub indicated that a Czech policy rate of 4.5% or slightly lower is realistic for end this year (currently 5.25%).

Minutes of the May 6-7 meeting of the Reserve Bank of Australia learnt that the RBA kept its policy rate unchanged at 4.35% as it wanted to avoid excessive fine tuning. The central bank’s economic scenario still sees inflation returning to the 2-3% target by late 2025 as consumption is expected to moderate. Even so, the RBA acknowledged, while still balanced currently, recent information showed that risks around inflation had risen somewhat. In this context, it is difficult for the RBA to either rule in or rule out a future change in the cash target rate. At the same time, the board showed limited tolerance for inflation to return to the 2-3% target later than 2026. If assumptions on the pace of the deceleration in inflation risk to be overly optimistic, a rate hike still can be considered again. Amongst others, a scenario of consumer spending picking up somewhat more rapidly due to strength in the labour market and better growth in public demand and business investment might all cause inflation to return to the target later than currently hoped for. Markets currently only see about a 50% chance of a first inaugural rate cut at the end of this year. AUD/USD eases slightly this morning to 0.666.

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June) rate cut which has broad backing. EMU disinflation continued in April and brought headline CPI closer to the 2% target. Together with weak growth momentum, this gives backing to deliver a first 25 bps rate cut. A more bumpy inflation path in H2 2024 and the Fed’s higher for longer strategy make follow-up moves difficult. Markets have come to terms with that.

US 10y yield

The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed’s Powell left the door open for rate cuts later this year. Soft US ISM’s and weaker than expected payrolls supported markets’ hope on a first cut post summer, triggering a correction off YTD peak levels. Sticky inflation suggests any rate cut will be a tough balancing act. 4.37% (38% retracement Dec/April) already might prove strong support for the US 10-y yield.

EUR/USD

Economic divergence, a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead and higher than expected US CPI data pushed EUR/USD to the 1.06 area. From there, better EMU data gave the euro some breathing space. The dollar lost further momentum on softer than expected early May US data. Some further consolidation in the 1.07/1.09 are might be on the cards short-term.

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view, suggesting that the disinflation process provides a window of opportunity to make policy less restrictive (in the near term). Sterling’s downside turned more vulnerable with the topside of the sideways EUR/GBP 0.8493 - 0.8768 trading range serving as the first real technical reference.

Daily Pivots: (S1) 197.76; (P) 198.21; (R1) 199.01; More...

Intraday bias in GBP/JPY remains on the upside. Current rise from 191.34, as the second leg of the corrective pattern from 200.53, should target 100% projection of 191.34 to 180.07 from 195.02 at 200.75. On the downside, below 197.07 will turn intraday bias neutral first. Further break of 195.02 will argue that the third leg has started, and target 191.34 support and possibly below.

In the bigger picture, a medium term top could be in place at 200.53 after breaching 199.80 long term fibonacci level. As long as 55 W EMA (now at 183.41) holds, fall from there is seen as correcting the rise from 178.32 only. However, sustained break of 55 W EMA will argue that larger scale correction is underway and target 178.32 support.

Daily Pivots: (S1) 0.8535; (P) 0.8551; (R1) 0.8562; More...

No change in EUR/GBP's outlook and intraday bias stays on the downside for 0.8529 support. Decisive break there will suggest that larger down trend is ready to resume through 0.8491/7 support one. On the upside, above 0.8567 minor resistance will delay the bearish case and turn intraday bias neutral first.

In the bigger picture, outlook remains bearish as EUR/GBP is capped below medium term falling trendline. That is, down trend from 0.9267 (2022 high) is still in progress. Firm break of 0.8491/7 will target 100% projection of 0.8764 to 0.8497 from 0.8643 at 0.8376.

Daily Pivots: (S1) 1.6233; (P) 1.6264; (R1) 1.6314; More...

Intraday bias in EUR/AUD is turned neutral as it recovered after brief dip to 1.6211. Further decline remains in favor as long as 1.6381 resistance holds. Break of 1.6211 will resume larger corrective decline from 1.7062 to 1.6127 support, or further to 100% projection of 1.7062 to 1.6127 from 1.6742 at 1.5807. However, break of 1.6381 will turn bias back to the upside for stronger rebound.

In the bigger picture, fall from 1.7062 medium term top is seen as a correction to the up trend from 1.4281 (2022 low). In case of deeper fall, strong support is expected around 1.5846 and 38.2% retracement of 1.4281 to 1.7062 at 1.6000 to bring rebound. Break of 1.7062 is in favor as a later stage.

Daily Pivots: (S1) 0.9871; (P) 0.9882; (R1) 0.9898; More....

EUR/CHF's rally is in progress and intraday bias stays on the upside. Decisive break of 61.8% projection of 0.9304 to 0.9847 from 0.9563 at 0.9899 will pave the way to 100% projection at 1.0106, which is slightly above 1.0095 key structural resistance. On the downside, below 0.9851 minor support will turn intraday bias neutral and bring consolidations first. But near term outlook will remain bullish as long as 0.9728 support holds, in case of retreat.

In the bigger picture, as long as 0.9563 support holds, rise from 0.9252 medium term bottom is still in favor to continue. Next target is 38.2% retracement of 1.2004 (2018 high) to 0.9252 (2023 low) at 1.0303, even as a correction to the down trend from 1.2004.

The week kicked off with quite a solid appetite, especially for commodities. Gold advanced to a fresh record and traded at $2450 per ounce yesterday despite a further rebound in US yields after more Federal Reserve (Fed) members voiced their preference for keeping the rates ‘high for longer’. Loretta Mester said that she no longer sees three rate cuts appropriate, Vice Chair Michael Barr insisted that current rates need more time to bring inflation down to 2%, Mary Daly isn’t confident that inflation will ease sustainably and Phillip Jefferson poured cold water on last week’s post-CPI optimism, saying that the data was encouraging but cooling is slower than he’d like.

Higher US yields increase the opportunity cost of holding the non-interest bearing gold and is not necessarily supportive of gold prices, but on the other hand, there is a broad-based and a growing worry that high-for-longer interest rates in the US will increase the debt burden on the US government and make the American debt – and the interest payments - unsustainable.

There is also the robust central bank buying – the central banks reportedly tripled their gold holdings since Russia invaded Ukraine and US blocked the Russian Central Bank’s US holdings.

Then, the geopolitical tensions around the world remain relatively high with war in Ukraine and in the Middle East, the tensions between China and the West remain relatively tight, China remains a serious threat in the South China Sea, Taiwan feels the heat every day. And the cherry on top: the uncertainty spurred by the death of the Iranian President added to the present positive dynamics on Monday.

For those who wonder whether the gold rally could extend, the answer is yes, it could. Trend and momentum indicators remain supportive of a further rise, the RSI doesn’t yet warn of overbought conditions. The $2500 per ounce psychological mark is probably the next natural target for the gold bulls against the US dollar.

Silver’s rise

The gold-silver ratio, also called the mint ratio, tanked to the lowest levels since January 2022 as gains in silver outpaced gains in gold. In fact, silver gained more than 20% against gold since the beginning of the year because… silver is a precious metal that’s used in industries – thus benefitting grandly from the so-called reflation trade. And silver is also used in clean energy like in solar panels – very popular these days. Value-wise, the mint ratio has historically fluctuated within the 60-80 band, and since 2021, it settled sustainably above this historical range. Presently, it is back within the range, but silver has room to gain against the yellow metal if the reflation narrative remains a major driver. In this respect, the gold-silver ratio could easily retreat toward 68 – the level that’s considered as the long-term historical average.

Speaking of reflation, copper futures also refreshed record on Monday. The widening gap between solidly growing demand for the red metal and sluggish global supply support the price rally, while the reflation trade further boost the demand outlook.

Interestingly, crude oil finds it hard to clear a major resistance near $80pb – a level that shelters the 200-DMA and the major 38.2% Fibonacci retracement on the ytd rally. While the Middle East tensions, rebound in Chinese industrial production, the reflation trade – that’s supported by the prospects of central bank rate cuts - and OPEC’s determination to restrict output remain supportive factors, the record US production and comfortable spare capacity from OPEC are pointed as factors that prevents oil bulls from confidently buying oil above $80pb. Another limit to oil appetite is the fact that rising oil is inflationary and a strong bounce in prices quickly revives the central bank hawks and tempers the reflation trade. All in all, oil could extend gains above the $80pb level, but the rise will likely be soft and slow. A rise toward the 50-DMA, near $82pb is plausible.

Elsewhere, the nat gas prices are finally picking up the momentum that many were waiting for, for months. So, enjoy the ride.

Of course, the commodity rally is also a boon for mining stocks, and the FTSE 100 has plenty of them in its pockets. The British blue-chip index is well positioned to benefit from the unfolding reflation narrative, especially if we see sterling retrace gains in the coming weeks – which I think is a growing possibility if tomorrow’s British inflation print satisfy the Bank of England (BoE) doves.

Elsewhere, Nasdaq 100 advanced to a fresh ATH, as Nvidia rallied 2.50% yesterday after Barclays lifted its price target from $850 to $1100 per share saying that it sees more revenue upside to current estimates. Nvidia will reveal its latest quarterly results tomorrow after the bell and can’t afford to drop the ball.

In focus today

Today, we look out for several Fed speakers as Williams, Barkin, Barr, Bostic and Waller are all speaking.

In Denmark, we get Q1 preliminary GDP figures, which we expect to be unchanged compared to the very impressive Q4 figures of last year. Further, refinancing auctions of mortgage loans will have the Danish bond market attention

In Hungary, the central bank will announce their rate decision after this week's policy meeting. We expect a cut of 50bp to 7.25% in line with consensus forecasts. If that holds true, this will be the 8th straight meeting with a cut.

Later this week, on Wednesday we look out for UK inflation and the cash rate decision from the Reserve Bank of New Zealand, who we expect will keep interest rate on 5.50%. On Wednesday as well we will have the FOMC minutes from last meeting. On Thursday we get PMIs from both the euro area, Japan and the US.

Likewise on Thursday we look out for wage data from the euro area and the rate decision from Central Bank of Turkey. On Friday we get inflation data from Japan and US consumer confidence from the University of Michigan survey.

Economic and market news

What happened overnight

In Australia, the minutes from the monetary policy meeting the 6-7 May showed that the Reserve Bank of Australia considered a hike to interest rates. They left the rates unchanged in part to avoid excessively fine-tuning policy. However, they judged that a future hike may be needed if current forecasts on inflation prove too optimistic.

What happened over the weekend

In the US, Fed's Barr, Jefferson and Mester on Monday all sounded cautious about inflation. Barr said that the inflation prints during first quarter disappointed him and that they did not give him confidence in cutting rates for the moment. Jefferson noted that it is too soon to conclude that inflation is back to a sustainable path towards Fed's inflation goal. Mester backed off on her earlier statement about three rate cuts in 2024, saying that at the moment it does not seem appropriate to cut rate three times in 2024. She further said that monetary policy was well-positioned at the moment. We expect the Fed to deliver its first rate cut at the September meeting.

In the UK, BoE's Broadbent said on Monday that a rate cut is possible this summer, if things continue to evolve with BoE's forecast as he said. We stick to our long-held view and expect the BoE to deliver its first 25 bp rate cut in June.

In Sweden, the Riksbank's Jansson said on Monday that a hike in June seems unlikely. Our expectations are in line with that path after Riksbank lowered interest rates at the last meeting.

In the euro area, HICP confirmed the flash release at 2.4% y/y and core at 2.7% y/y. The details show that the important domestic inflation, which the ECB focuses a lot on, declined to 4.32% y/y in April from 4.42% in March. However, momentum is still strong and increased in April now running at 5.32% 3m/3m at seasonally adjusted annual rate. Hence, momentum in domestic inflation should continue to worry the ECB.

In the Middle East, the International Criminal Court (ICC) sent out request warrants for Israeli prime minister Netanyahu, his defence chief as well as three Hamas Leaders over alleged war crimes in the ongoing conflict. Both sides have denounced the decision. Further, the death of Iran's president made oil rise slightly short term, but overall, the news did not affect markets broadly.

In China, the government unveiled a package to prop up the housing market. It is easing mortgage rules by scrapping a nationwide minimum mortgage interest rate and cut the minimum down-payment ratio to 15% for first-time buyers and 25% for second-time buyers (from 20% and 30%, respectively). The central government also stated local governments should buy empty homes and turn them into affordable housing. The Peoples Bank of China (PBOC) also announced a CNY 300bn (USD 42bn) relending scheme for affordable housing to support this. The measures underline the picture that the government is taking more and stronger measures to turn around the housing crisis. Chinese stocks increased after the news.

The PBOC announced on Monday that they kept the loan prime rates unchanged at 3.45% for the one-year rate and 3.95% for the five year rate, which was in line with market expectations.

Market movements

FI: Long-end rates have continued to move higher since our latest update last Friday. 10Y Bund yields are back at 2.53% - up by 7bp since the Thursday close - while the 2s10s is about 2bp higher. Similarly, 10Y UST yields are back at 4.45%. The repricing in FI markets has been quite smooth over the past sessions with no single driver explaining the move. Markets are back pricing about 65bp worth of ECB rate cuts in 2024 (about 5bp less since the Thursday close). Implied US rates volatility - as measured by the MOVE Index - is now trading at the lowest level since the beginning of April. The Bund ASW-spread closed at 30.7bp yesterday - the tightest level seen since mid-March.

FX: Not a very eventful start of the week in FX space. The USD is slightly stronger vs the EUR at 1.0860 while USD/JPY at 156.50 may have last week's highs 156.70 on its mind. EUR/GBP remains firmly range bound around the 0.8550-0.8600 mark. EUR/SEK made new attempts to break below 11.60 yesterday, now at 11.61. NOK/SEK hovers just below parity, eyes 0.09970 lows of last week. In CEE, PLN, CZK and HUF hold on to their more than one percent gain vs the EUR thus far in May.

Daily Pivots: (S1) 1.0846; (P) 1.0865; (R1) 1.0877; More...

Intraday bias in EUR/USD remains neutral as consolidation continues below 1.0894. Further rally is expected as long as 1.0810 resistance turned support holds. Break of 1.0894 will resume the rise to 1.0980 resistance. Decisive break there will confirm that whole fall from 1.1138 has completed at 1.0601 already.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern. Fall from 1.1138 is seen as the third leg and could have completed. Firm break of 1.1138 will argue that larger up trend from 0.9534 (2022 low) is ready to resume through 1.1274 high. On the downside, break of 1.0601 will extend the corrective pattern instead.

Daily Pivots: (S1) 1.2687; (P) 1.2707; (R1) 1.2725; More...

Intraday bias in GBP/USD remains on the upside for the moment. Firm break of 1.2708 resistance will extend the rise from 1.2298 to 100% projection of 1.2298 to 1.2633 from 1.2445 at 1.2780. On the downside, below 1.2642 minor support will turn intraday bias neutral again. But further rise will now remain in favor as long as 1.2445 support holds, in case of retreat.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern. Fall from 1.2892 is seen as the third leg which might have completed already. Break of 1.2892 resistance will argue that larger up trend from 1.0351(2022 low) is ready to resume through 1.3141. Meanwhile, break of 1.2298 support will extend the corrective pattern instead.

Daily Pivots: (S1) 0.9087; (P) 0.9098; (R1) 0.9118; More....

Intraday bias in USD/CHF is mildly on the upside with breach of 0.9101 resistance. Corrective fall from 0.9223 might have completed with three waves down to 0.8987 already. Further rally should be seen back to retest 0.9223. On the downside, though, break of 0.8987 will resume the fall to 38.2% retracement of 0.8332 to 0.9223 at 0.8883.

In the bigger picture, price actions from 0.8332 medium term bottom are tentatively seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Rejection by 0.9243 resistance, followed by sustained break of 38.2% retracement of 0.8332 to 0.9223 at 0.8883 will strengthen this case, and maintain medium term bearishness. However, decisive break of 0.9243 will argue that the trend has already reversed and turn medium term outlook bullish for 1.0146.