Market movers today
Focus this week continues on news regarding the US banking sector but inflation is also back in the spotlight with the US CPI release on Wednesday. We also have US inflation expectations from the University of Michigan on Friday, which showed a somewhat surprising rebound in April. In the Nordics CPI in Norway is up on Wednesday.
Today is a quiet day on the data front with the Euro Sentix survey for May being the main release of interest. It normally gives a good indication on other indicators such as PMI. After recovering in late 2022 it has moved broadly sideways over the past three months. We also get the Federal Reserve’s survey of loan officers which will attract attention amid focus on regional bank weaknesses.
The 60 second overview
Markets: Sentiment this morning is characterised by “green” equity markets with most Asian equity indices following their US counterparts higher after a strong close to the US session on Friday. Overnight yields are close to unchanged and also commodities and FX markets have shown little volatility to start the week.
Bank jitters. Regional bank concerns have faded again with bank stocks performing sharply. Our baseline scenario is still that banking stress is a symptom of monetary tightening and that it will be fairly contained and not turn into a more systemic crisis. But it needs close monitoring as these things can sometimes become self-fulfilling and spread like dominoes falling one by one – as witnessed for example during the euro debt crisis.
US jobs: At a gain of +253K Friday’s nonfarm payrolls report revealed slightly larger than expected job growth in April albeit the release also showed negative revisions of -149K for February and March. For markets, the most important thing was the higher-than-expected wage growth of +0.5 m/m which is why rates rose and the USD rallied upon announcement. The household survey showed a surprise decline in the unemployment rate from 3.5% to 3.4% while the participation rate was unchanged.
The rise in the US wage sum – the product of employment and wage gains – shows that the nominal engine behind the US economy remains on a strong footing. This leaves the Fed in a tough spot where they have to decide on either keeping rates at current contractionary levels for longer or to deliver additional rate hikes. We are leaning towards the former. Either way we still think that rates markets’ pricing of around 70bp rate cuts in H2 are overdone.
Oil. Oil prices rebounded on Friday after global risk sentiment improved. OPEC+ production cuts are currently secondary to risk sentiment and demand expectations and we expect that to continue to be the case in the short-term. Further recovery in risk sentiment should help Brent recover back above the USD80/bbl. Another OPEC+ production cut and/or halt of US selling of strategic reserves would help floor prices in our view.
Debt ceiling: US Treasury Secretary Janet Yellen yesterday warned that should Congress fail to act on the debt ceiling in the coming month it would risk triggering a “constitutional crisis”. Markets also show rising concern as we approach the so called x-date albeit so far the market reaction at stage primarily has been contained to the T-bill and CDS markets. A solution to the debt ceiling in the 11th hour remains our base case.
Equities: Take a solid job report and mix it with some regional bank ease, and you will end up with an equity rally. US equities surged on Friday with all indices adding around 2%. As the recession is still far from the labor market, cyclicals outperformed massively. Quality/growth stocks are still outperforming, but Friday also brought energy and financials among the leaders. The S&P 1500 regional bank index rebounded 7%. There were probably some positioning to this too, as the VIX shaved off -14% to 17. US futures are unchanged this morning.
FI: Global bond yields rose on Friday on the back of the stronger than expected US labour market data. 10Y Treasury yields rose some 5-6bp, while 10Y German government bond yields rose 7-8bp. However, we are still at a lower level than the start of the week despite the tighter monetary policy in both Europe and US. However, we are getting close to the peak in policy rates in Europe and US. Furthermore, the 10Y spread between Italy and Germany has remained fairly stable despite ECB ending APP reinvestments from July.
FX: EUR/USD moved lower on stronger than expected non-farm payrolls during Friday’s session, but reversed the move later in the session ending back above 1.10. General risk-on and rally in oil lifted AUD, MXN, NOK and CAD with the latter being the top-performer in Friday’s Majors session. EUR/SEK has fallen back below the 11.20 mark. Following a lower than expected April inflation print, EUR/CHF moved back above 0.98.
Credit: Credit markets were back in risk-on mode on Friday, potentially bouncing back from an overly negative reaction to the ECB meeting on Thursday. Itrax main tightened 4.1bp to close at 86.2bp, while Itrax Xover tighthened 18.7bp to close at 449.8bp. Primary markets were relatively muted.
Nordic macro
Debt Office releases the April budget balance. DO expects a SEK23.5bn surplus. That said, it might be wise to take into account that in Feb-Mar the budget balance showed a “surprise” excess surplus amounting to no less than SEK49bn, a pretty significant deviation over two months.
