Markets
With only second tier data on the agenda, yesterday brought a session of order-driven, technical trade. ECB and Fed speakers mainly held to recent narratives. In the end, the US yield curve inverted slightly further with the 2-y gaining marginally while the 10 and 30-y ceded slightly less than 2.5 bps. US housing data printed mixed with housing starts marginally better than expected (1420k) but permits declining more than hoped for (1413k). Fed’s Bostic defended the March dots advocating one additional rate hike in May and holding the policy rate above 5% for some time. Fed’s Bullard in an interview with Reuters kept a more hawkish tone, as he favours a scenario of the policy rate being raised to 5.5%/5.75%. He also pushed back against the idea that the US economy is heading for a recession, with the labour market holding strong and pandemic savings still being used to support spending. The German curve showed a similar, modest move with the 2y yield adding 2.7 bps. The 30-y ceded 1.8 bps. ECB’s chief economist Lane indicated that a further rate hike in May is appropriate, with data to decide on the size of the move. He doesn’t exclude a 50 bps step. On equity markets, Europe (Eurostoxx 50 + 0.60%) still outperforms the US (major indices hardly changed). The dollar didn’t profit from the Bullard comments. On the contrary, DXY eased from 102.10 to 101.75. EUR/USD rebounded to close at 1.0972. Sterling initially tried to capitalize on strong labour market data, but the momentum gradually faded. EUR/GBP closed the day little changed at 0.883.
There is again no really high profile (eco) news to guide trading this morning. Asian equities mostly trade with modest losses. US yields are trending higher (1-3 bps) after higher than expected UK CPI data (cf infra). The dollar is gaining a few ticks (USD/JPY 134,35; EUR/USD 1.0965). Later today, there are again few eco data in the US and EMU. Speeches of ECB’s Lane, Knot, de Cos and Schnabel are worth to keep an eye on. Later this evening, the Fed will publish the Beige Book, preparing the May 3 policy meeting. EUR/USD trading for now is guided by a short-term consolidation pattern between 1.0831 and 1.1076. On yields markets, the US 2-y and 10-y yield face important resistance respectively near 4.25% and 4.64%.
UK March price data printed well above expectations. Headline CPI inflation rose 0.8% M/M and 10.1% Y/Y (0.5% and 9.8% expected). Core inflation stabilized at 6.2% while a decline to 6% was expected. PPI was also higher than expected. Combined with yesterday’s strong labour market data, the report gives the BoE little choice but to continue its hike cycle at the May 11 meeting. Sterling gains immediately after the release. EUR/GBP dropped to the 0.882 area. However, yesterday’s price action showed that one should be cautious to draw early conclusions.
News and views
Hungary’s central bank deputy governor Virag said the “multi-step” interest rate normalization may start at next week’s monetary policy meeting. The MNB in first instance could change the width of the interest rate corridor by cutting the top-end “by a significant margin”. This top-end collateralized lending rate currently stands at 25%. Modifying the O/N 18% tender rate, the de facto policy rate, would only be on the agenda at the subsequent rate meetings. Hungarian inflation barely eased from 25.4% in February to 25.2% last month. Virag nevertheless expects the disinflationary process to speed up from April. Helping the MNB’s inflation fight is the recent HUF strengthening. Boosted by the 18% interest rate, the forint appreciated from briefly above EUR/HUF 400 mid-March to the low 370 area yesterday. At EUR/HUF 371.09, the currency closed at the strongest level since April 2022.
EU negotiators yesterday agreed on a final version of a €43bn plan to turn Europe into a key player in the market of semiconductors after “just” 14 months. The continent is keen in ramping up own output in the wake of the pandemic and subsequent supply chain disruptions and in a context of rising geopolitical tensions. The European Union’s ambition is to manufacture about 20% of world’s production by 2030, up from 10% currently. The Chips Act allows EU member states to provide financial support for “first-of-a-kind” semiconductors. It is the first of a series of industrial plans that let governments increasingly intervene in the supply chain..
. Core inflation stabilized at 6.2% while a decline to 6% was expected. PPI was also higher than expected. Combined with yesterday’s strong labour market data, the report gives the BoE little choice but to continue its hike cycle at the May 11 meeting. Sterling gains immediately after the release. EUR/GBP dropped to the 0.882 area. However, yesterday’s price action showed that one should be cautious to draw early conclusions.){kind=link}