US Treasuries Rallied With Front End Outperforming

Markets

The unexpected OPEC+ production cut pushed Brent crude prices from $80/b to $85/b, but its impact on other market segments was completely undone by a disappointing US March manufacturing ISM. Instead of the expected stabilization round 47.7, the ISM dropped to 46.3. It’s the weakest reading since May 2020 and highlights the global divergence between loss of momentum in manufacturing and booming business in services activity (to be confirmed in tomorrow’s non-manufacturing ISM). Details showed broad-based fatigue. Production ticked up marginally from 47.3 to 47.8, but new orders (44.3 from 47) and new export orders (47.6 from 49.9) don’t bode well. Employment fell deeper below the 50 boom/bust mark as well (46.9 from 49.1). Companies don’t want to commit themselves too much given receding demand, ending inventory accumulation (47.5 from 50.1). Global supply chain issues are no longer an issue with supplier deliveries reaching the lowest level since 2009 (44.8 from 45.2). Producer prices ticked slightly lower on the month (49.2 from 51.3). Even though the Fed’s focus is currently mainly on the services part of the US economy, markets reacted fiercely to the disappointing outcome. US Treasuries rallied with the front end of the curve outperforming. US yields eventually closed 2 bps (30-yr) to 7.4 bps (5-yr) lower. Filtering out opening gains, shows double digit intraday declines at the front end of the curve. On the German curve, the very long end outperformed with daily yield losses between 1 bp (2-yr) and 5.8 bps (30-yr). The reaction on FX markets was again much more muted with EUR/USD erasing early losses to close around 1.09 without testing 1.0930 resistance. Main US stock indices ended mixed with Nasdaq ceding 0.27% and the Dow Jones gaining around 1%. Fed governor Cook after close said that the disinflationary process is underway but that “we’re not there yet”.

This morning’s Asian session was rather subdued. The Honk Kong Monetary Authority did for the first time since February have to intervene in the FX market to prop up the local dollar after hitting the top end of the pegged trading band at USD/HKD 7.85. Today’s eco calendar is thin with US JOLTS Openings filling the gap between the manufacturing ISM and tomorrow’s ADP employment report and non-manufacturing ISM. After yesterday’s unpleasant surprise, we expect a market preference to err on the dovish side of expectations in the run-up to this week’s remaining releases (also payrolls on Friday). Speeches by central bankers are wildcards.

News and views

The Reserve bank of Australia (RBA) today kept its policy rate unchanged at 3.6%. It follows a cumulative increase in interest rates of 350 bps since May last year. The RBA indicates that policy tightening comes with a lag and that the full effect of the increases in the policy rate still has to be felt. It will now take its time to further assess the impact on data and on the economic outlook. The central bank assumes that Australian inflation has peaked. Goods prices probably will continue to ease, but rents are still increasing at the fastest pace in some years, the vacancy rate stays high and utility rates continue rising quickly. The RBA predicts inflation to ease to 3% in 2025. It also expects growth below trend in the next couple of years. As the labour market remains tight, the RBA continues to keep a close eye at labour costs and wages. In this respect, some further tightening of policy might still be needed. The 2y Australian government yield opened already low before the RBA policy announcement and lost another 5 bps after the decision. (2.91%). The loss in the Aussie dollar remains modest (AUD/USD 0.6765).

South Korean inflation slowed in March to 0.2% M/M to 4.2% Y/Y, from 0.3% M/M and 4.8% Y/Y in February. The 4.2% Y/Y inflation print was the lowest in a year. However, core inflation (excluding oil and agricultural prices) was unchanged at 4.8%, holding within reach of the cycle peak of 5% (in January). The decline in the headline figure was mainly due to lower energy prices. The Bank of Korea after the report indicated that it expects inflation to ease further, but it will stay above the 2% target this year. Core inflation will probably decline at a slower pace. The central bank meets next week. At the February 23 policy meeting, it left its policy rate unchanged at 3.50%. However, at that time, the BoK didn’t formally announce an end to the rate hike cycle yet. After opening stronger, the won this morning eases modestly to USD/KRW 1314.