Markets
When it takes financial newswires more than five and a half hours (and counting) to spit a new market relevant headline, that’s when you realize it is a very, very quiet trading day. How can it not be if both US (Memorial Day) and UK (Spring Bank Holiday) markets are closed. Today’s focus, if any, was on European CPI figures in individual countries. Spanish HICP in May stranded on 2.4% y/y, as expected. Italy just missed the consensus bar (1.3% vs. 1.4%) while Germany slightly beat expectations with an acceleration from 2.1% y/y to 2.4%. The EMU wide reading is scheduled for release tomorrow. Today’s data obviously doesn’t suffice to bring the reflation theme back to life neither did the updated OECD growth forecasts. It revised global growth for 2021 from 5.6% to 5.8% but warned for large differences across countries. Most of the advanced economies received an upgrade, including the Eurozone (4.3% from 3.9%), the US (6.9% from 6.5%). China also got a boost to 8.5% for this year (up 0.7ppts) but India, struggling to contain the pandemic, was revised downwardly from 12.6% to 9.9%. On inflation, the OECD said its rise is only temporary but with longer-term upside risks. European stocks kick off the trading week with a touch of cautiousness, trading marginally in the red. The EuroStoxx50 is down 0.2% after taking out key resistance around 4040 Friday last week. The German yield curve marginally bear steepens with the belly underperforming the wings. Yield changes vary from 0.7 bps (2-yr) over 1.6 bps (5-yr, 10-yr) back to 0.6 bps (30-yr). Rising oil prices are helping yields rise. Brent oil is up about 1.5%, nearing strong resistance near the $70/b pivot ahead of the OPEC+ meeting on Tuesday. Peripheral spreads tighten marginally (-1 bp in Greece, Spain, Portugal and Italy). FX markets trade clueless. EUR/USD remained anchored at 1.22. It may have had zero impetus to trade today but that’s definitely to change soon with US ISMs, payrolls, the Fed’s Beige Book and tons of speeches all due later this week. Other dollar pairs tend to edge a bit lower with USD/JPY down from 109.8 to 109.60. The trade-weighted DXY barely keeps the 90 barrier dry. EUR/GBP tossed up a coin this morning and decided to go for some minor gains. The currency pair is tentatively regaining the 0.86 lever.
News Headlines
The People Bank of China announced that the country’s financial institutions from June 15 on will need to hold 7% of their FX in reserve instead of the current 5%. It’s the first such increase since 2007 with the PBOC taking its first specific measure as of yet to try to stem the rise of the yuan somewhat. The changes to banks’ liquidity management in theory reduce the supply of foreign currency. While the move is more of a symbolic one, it shows that the PBOC has taken notice of the recent CNY-move. A combination of USD-weakness and CNY-strength pulled USD/CNY from around 6.55 by the end of March to 6.37 currently, the strongest CNY level since May 2018.
The ECB published a working paper by the head of its monetary policy research division on inflation target types and the anchoring of inflation expectations. The author compares point targets, tolerance bands around point targets and specific target ranges. For advanced economies, he concludes that point targets perform relatively poorly when inflation strays far from target repeatedly, in the sense that inflation expectations become more dependent on realized inflation. Defining a band could therefore bolster credibility and could be the direction the ECB will take when it concludes its internal review later this year.
