Markets
The balance between growth and inflation still was the talk of the town on Friday and will likely continue dominating the debate. EMU growth slowed to 0.2% Q/Q from 0.3% resulting in a 5.0 Y/Y. Few details on the composition of were available yet. However, ‘anecdotic’ evidence suggests that even the hoped for post-covid rebound in contact related activities/services is eroded by the cost of living crisis. In the respect, EMU April inflation ‘stabilized’ at 7.5% Y/Y, but core inflation again accelerated faster than expected from 2.9% to 3.5%, an indication that price rises are affecting activity in ever more profound way. Markets concluded that this imbalance only can be addressed by more decisive CB action.
The German yield curve bear flattened with yields rising between 6.3 bps (2-y) and 3.8 bps (10 & 30-y). The 10-y EMU inflation swap closed at a historic top of 3.14%!! It can only be seen as a de-anchoring of inflation expectations.
US eco data were mixed, but a faster than expected rise in the employment cost index (1.4% from 1.0%) forced US interest markets to a similar conclusion. US yields jumped between 11.6 bps (5-y) and 9.7 bps (2-y). One difference compared to Europe, the rise was driven by a sharp rise in real yields (10-y +15 bps). The latter, combined with uncertainty on future corporate results, hammered US equities with the Nasdaq ceding 4.17%! EMU stocks still closed with limited gains (EuroStoxx 0.68%).
In theory, the rise in US real yields could have been a positive for the dollar. However, after the recent astonishing rally, the greenback fell prey to modest profit taking. The DXY index closed just below 103 (open 103.61). USD/JPY finished at 129.70. Even the euro regained some ground closing at EUR/USD 1.0545 (from 1.0499 on Thursday). Still, the picture remains very fragile. Sterling slightly outperformed the euro (EUR/GBP close 0.8388) as investors were counting down to this week’s BOE policy decision. Poor China PMI’ published this weekend (composite 42.7 from 48.8, services tumbling from 48.41 to 41.9) confirmed that Covid lockdowns in major Chinese cities taking a big toll on growth. Chinese equity markets are closed for the Labour day Holiday, but the data don’t help to restore confidence on the back of Friday’s WS sell-off. The offshore yuan (USD/CNH 6.683) is losing further ground. European equity futures are indicating losses of 1.0%. The dollar already regains part of Friday’s correction and US yields remain upwardly oriented.
Today, the US Manufacturing ISM and the EC confidence data will be published. US data recently held up quite well and the ISM is still expected to rise marginally to 57.6. EC economic confidence is captured in a downtrend and a further erosion from 108.5 to 108 is expected. Negative surprises can put further pressure on equities, but we don’t expected a sustained decline in US or European yields yet.
Several central banks this week are expected to step up their efforts to arrest inflation (RBA tomorrow, Fed Wednesday, BoE and Czech central bank on Thursday). The Norges Bank (Thursday) is expected to take a pause. A fragile risk sentiment and decisive Fed action probably will keep the dollar supported. The absence of an unambiguous ECB commitment, keeps the door open for EUR/USD return action toward the 1.0341 2017 low.
News Headlines
Rating agency S&P affirmed the Czech Republic’s AA- rating with a stable outlook. The Russian war in Ukraine triggered a downward revision for this year’s growth forecast from 4% to 1.8%, but for now is no reason to downgrade the Czech rating. If the conflict has an even bigger economic effect, it could nevertheless become the case. Especially should monetary and fiscal authorities reverse their tightening stances currently in place to rein in high and rising inflation. Low government and external debt, combined substantial FX reserves provide a solid buffer for the Czech rating. The Czech koruna barely suffered a setback last week despite the combination of rising rates and crashing stocks. EUR/CZK changes hands around 24.60.
