Markets
Economic data during yesterday’s trading day was limited to US housing data (see below). The Fed’s Beige Book held all the anecdotical evidence one could have expected: a tight labour market and strong inflationary pressures. Districts saw the economy still growing at a moderate pace but mentioned that geopolitics were clouding the outlook.
Turning to markets, European stocks had a good run. The EuroStoxx50 rose 1.7%. Wall Street ended mixed with the Nasdaq underperforming (-1.22%) on some individual slip-ups (Netflix, woops). Core bonds corrected higher after a rocky session on Tuesday. US Treasuries outperformed in a bull flattening move. Yields slid 1.6 bps in the 2y to 12.9 bps in the 20y tenor with bonds in the latter bucket profiting from a very strong auction. The $16bn reopening was awarded at 3.095% compared to a 3.125% WI yield. Indirect bidders’ share jumped to 75.9%, highlighting very high (foreign) demand. Bid-to-cover was a record 2.80.
European swap yields eased between 7 and 9 bps in the 10-30y segment. Declines at the front-end stayed limited to 2-3 bps and were even less intraday after ECB’s Kazaks and especially German heavyweight Nagel both suggested a rate hike is possible as soon as July. Their comments supported EUR/USD (finished at 1.085, up from 1.078) to some extent, but the bulk of the move came on the account of the dollar.
The greenback lost against all major peers, including the ailing Japanese yen. USD/JPY snapped a 13-day winning streak to close at 127.86, down from 128.91. Cable (GBP/USD) rebounded from the 1.30 support area to 1.3068. The euro did keep the upper hand against sterling, rising back above 0.83 but without strong conviction. Among the smaller currencies, the Canadian loonie and Swedish krone stand out. Both gained as higher-than-expected inflation in Canada paved the way for more double-sized hikes by the BoC while Riksbank governor Inges turning the April meeting into a live one. Asian dealings are pretty quiet. Stock markets trade mixed with Japan (+1.3%) and China (-2%) marking both ends of the spectrum. Core bond yields already recoup some of yesterday’s losses. The US adds 4-5 bps.
On currency markets, the Japanese yen and Swiss frank trade on the back foot. Japan’s Finance Minister Suzuki’s verbal interventions, including those this morning, have less effect by the day.
EUR/USD rebounded intraday to trade near yesterday’s closing levels after Belgian ECB governor Wunsch joined the hawkish parade led by Nagel and Kazaks. He said policy rates could turn positive this year. The kiwi dollar trades a tad lower after inflation rose but by less than expected (see below).
The eco calendar contains US weekly jobless claims and European consumser confidence (April). However, after the recent string of hawkish ECB speeches, we’re very keen to what president Lagarde has to say. Together with Fed chair Powell she takes part in an IMF panel on the global economy tonight. Tomorrow she’ll give a keynote speech at the Peterson Institute for International Economics (PIIE) where she will undoubtedly dive into monetary policy. A clear and concrete hint towards a more rapid normalization will definitely be noticed, both by rates and the euro. EUR/USD returning above 1.0954 would ease some of the immediate downward pressure but the first high-profile reference is located at 1.1121.
Also keep an eye at sterling today. The PIIE also invited Bank of England governor Bailey to touch upon economic and monetary policy tonight. Will he still hold the line of a cautious normalization approach with inflation having run at a consensus-beating 7% in March?
News Headlines
Inflation in New-Zealand in the first quarter accelerated to 1.8% Q/Q and 6.9% Y/Y (was 1.4% Q/Q and 5.9% Y/Y in Q4 2021), reaching the highest level since the second quarter of 1990. The RBNZ aims to keep inflation within a 1.0%-3.0% target range. Inflation excluding food, fuel and energy prices rose 5.9% Y/Y from 5.4%. Even as inflation was visible in a broad range of product groups, the Y/Y measure was slightly below market expectations for a 7.0%+ figure (headline). Last week, the RBNZ frontloaded policy tightening, raising its policy rate by bigger than expected 50 bps to 1.5%. Today’s inflation data suggest that further tightening is needed. Markets still see a 80% probability of the RBNZ continuing with a 50 bps rate hike at the May 25 meeting. The 2-y yield eased 4 bps to 3.10%. The Kiwi dollar in a first reaction also lost modest ground slipping below the NZD/USD 0.68+ handle. However, the move doesn’t go far (currently 0.6790). US existing home sales in March dropped by 2.7% M/M, the second consecutive decline after an strong monthly decline of 8.6% M/M in February. The decline brought the SAAR of sales to 5.77m, the lowest level since June 2020. However, other parts of the report showed that the market remains tight with median price of an existing home rising 15 % Y/Y to a record high of $375 300. Inventories rose modestly but remain tight and houses mostly only remain on the market only for a brief period of time. Even so, going forward higher mortgage yields might come in play. Mortgage applications for the week ending 15 April declined another 5.0%, the sixth consecutive negative reading.
