Markets
Markets yesterday had to cope with multiple, divergent pieces of news both on inflation and growth. Most data still suggested that the former is becoming an ever bigger hurdle for the second. Chinese data are flagging that strict corona measures cause the second largest economy to be a drag rather an a motor for world growth as it will add both to supply chain disruptions annex higher prices and hamper demand at the same time.
EC confidence declined faster than expected from 106.7 to 105. The supply/industry related subseries were not too bad, but the European consumer clearly fears the war in Ukraine to spark a protracted cost of living crisis (-22.0 from -16.9).
US eco data of late were resilient but the April manufacturing ISM (55.4 from 57.1 vs 57.6 expected) shows that prices/supply issues are still abundant, but demand shows tentative signs of easing, too. Initially, all this led to outright risk-off, especially on European indices. The EuroStoxx50 lost 1.85%. US indices after a hesitant start finally rebounded (Dow +0.26%, Nasdaq + 1.63%).
US yields didn’t change course despite uncertainty on growth, rising between 4.7/4.9 bps (5-y/10y) and 1.7 bps (2-y). The decomposition of the move in the 10-y yields was striking. The US 10-y real yield jumped more than 15 bps to 0.14%, partially compensated by a decline in inflation expectations (-11 bps). Two days before the Fed decision, market confidence is high that Fed rate hikes and QT will do the job.
The German yield curve also steepened with the 2-y yield easing 1.9 bps and the 30-y rising 4.8 bps. There was a slight easing in EMU inflation expectations, too. However, 10-y EMU inflation swaps now moved above their US counterparts (3.08% vs 3.0%), illustrating the loss of confidence in the ECB’s mandate to anchor inflation at its 2.0% target over the policy horizon, or even far beyond.
The DXY USD index reversed Friday’s correction (close 103.74) but didn’t break last week’s top. EUR/USD still struggles to avoid a break below 1.05. Sterling initially outperformed the euro, but a late session setback even caused EUR/GBP to close north of 0.84.
This morning Japanese and main Chinese markets are closed. Later today US JOLTS job openings, German and EMU labour market data are interesting but no market mover. Investors will mainly count down to tomorrow’s Fed decision, unless some unexpected news from the Ukraine conflict were to interfere. We keep a close eye whether the US real yield will extend its journey further into positive territory. In more constructive risk sentiment, this shouldn’t immediately translate into a further acceleration of the dollar. That said, the US currency clearly remains in pole position. At the same time, it will be difficult for EUR/USD to avoid a return to the 1.0341 correction low, unless the ECB decisively steps up its anti-inflation commitment.
News Headlines
The Reserve Bank of Australia completed a Riksbank-style sudden policy U-turn by lifting its policy rate this morning from 0.1% to 0.35%. More rate hikes are coming to ensure a return of inflation towards target. The RBA also decided to no longer reinvest proceeds of maturing government bonds. The Australian economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up, a key factor for the RBA to start a tightening cycle. Australian GDP growth is forecast to remain strong at 4.25% this year and 2% next. A further rise in inflation is expected short term (6% headline; 4% core), before moderating towards 3% (upper tolerance band) by mid-2024. AUD/USD (0.71) bounces away from the danger/support zone in the low 0.70-area. The AUD swaps curve bear flattens with yields rising by 2.7 bps (30-yr) to 13.5 bps (2-yr). Australian markets discount another 250 cumulative bps of rate hikes this year.
