Markets
We had to wait for some US figures to spice up yesterday’s trading session a little bit. ISM manufacturing confidence unexpectedly accelerated from 55.4 to 56.1, mainly as new orders kept flowing in strongly (55.1). Supplier deliveries eased only marginally to a still-lofty 65.7 and employment fell (49.6), both highlighting ongoing supply disruptions, material shortages and personnel-related capacity constraints. Near-record JOLTS with, give or take, two openings per unemployed American served as another point in case. The strong data caused the US yield curve to bear flatten with changes from 1.2 bps (30y) to 9.7 bps (3y, 5y). Investors ramped up bets for Fed tightening with markets just a few bps shy of pricing in another 50 bps hike in September after June and July. European yields rose in lockstep, adding between 4.9 and 7.3 bps across the curve. The German 10y (+6.5 bps) yield closed at a new cycle high at 1.187%, surpassing 1.127% resistance from the 2012/2013 interim lows. UST underperformance and lacklustre stocks (about -0.7%) swung the dollar higher. The trade-weighted index jumped beyond 102(.49), EUR/USD retreated from 1.073 to 1.065. USD/JPY tested the 130 big figure. Sterling was unable to benefit from a sharp(er) rise in Gilt yields ahead of a 4-day weekend. EUR/GBP instead eked out a gain beyond 0.8512 resistance to the 0.853.Stocks in the Asian-Pacific region fall with Hong Kong underperforming (-1.8%) as it reinstated some Covid Zero measures by quarantining patients even with mild symptoms. Rating agency S&P reaffirmed China’s rating at A+ with a stable outlook. The yuan declines nonetheless with USD/CNY nearing 6.70. Most other dollar pairs trade stable. EUR/USD hovers sideways around 1.066. Core bonds trade listless. Oil prices ease (Brent -1.7%) following reports that Saudi Arabia is ready to raise production should Russian output decline materially.Today serves as a transition day before US payrolls are released tomorrow. The unofficial ADP jobs report (300k exp.) and jobless claims may give some taste but probably won’t be defining for trading. OPEC+ holding its monthly meeting is worth watching too following the latest reports (see above and yesterday). There are some ECB speeches scheduled but the central bank’s quiet period starts today. The Fed’s kicks off this Saturday. On markets, the core bond yield correction lower was showing signs of bottoming out over the past few days from a technical perspective. Inflation data in the eurozone and yesterday’s strong numbers in the US added a fundamental layer to that. We see no reason for that to change for the time being. It may bring equities back in a tougher spot, making it difficult for EUR/USD to take out first resistance around 1.0758 on a sustained basis. UK markets are closed today and tomorrow.
News Headlines
The Bank of Canada yesterday as expected raised its policy rate by 50 bps to 1.5%. It also continues its quantitative tightening. CPI in April reached a higher-than-expected 6.8% and the BOC expects it to move even higher in the near term. Inflation is broadening with measures of underlying inflations rising and 70% of the CPI categories printing above 3%. The global economy will probably slow down but growth in Canada in Q1 was solid (3.1%) and the BOC expects this to continue in Q2 on consumer spending and exports. Job vacancies are elevated and wage growth is rising across sectors. With the economy remaining in excess demand and inflation seen moving further above target, rates will need to rise further and the governing council is prepared to act more forcefully if needed. USD/CAD traded quite volatile after the policy announcement. The possibility of a faster and more protracted rate hike cycle is CAD-supportive. However, at the time of the BOC announcement, the USD dollar also jumped sharply higher on a strong US ISM. At the end of the day, USD/CAD even traded marginally stronger at 1.2657.
