Markets
US yields yesterday rebounded further from the key support levels (10-y 3.25%/3.30% area, 2-y 3.60/3.65% area) that were at risk after the Fed hinted at a pause in its hiking cycle last week. However, last week’s payrolls at least suggested that the feared-for collapse in demand apparently isn’t around the corner yet while wage growth remains higher than what is consistent with an easy return to the 2% target. Yesterday, the Senior Loan Officer Opinion survey and the Fed financial stability report as expected showed a tightening of lending standards and a decreasing demand for loans, a move that already started before the SVB crisis. In its financial Stability report, the Fed also concluded that bank’s anticipation on slower growth and lower credit quality, amongst others, might reduce the availability of credit. At the same time, the Fed assessed bank funding and liquidity are relatively stable. Commercial real estate remains an area of concern. Looking at the market reaction, both reports apparently didn’t bring additional negative news. US yields closed near the intraday peak levels, adding between 8.7 bps (2-y) and 6.9 bps (30-y). Bunds outperformed Treasuries with German yields rising between 5.1 bps (2-y) and 2.6 bps (30-y). The fall-out from the interest rate repositioning on other markets was modest. US equities closed little changed. The dollar gained modestly (DXY close 101.38; EUR/USD 1.0004). However, the technical picture hasn’t changed, with the US currency still unable to really move away from recent lows. Even with UK markets closed sterling outperformed. EUR/GBP tested the 0.8721/0.8691 support area (close 0.872). However, we don’t draw any in depth conclusion before Thursday’s BoE policy decision, including a new economic assessment/monetary policy report.
Asian equities are trading mixed this morning with Japan outperforming. US yields decline 1-2 bps. The dollar gains marginally. There are again few data in Europe or the US. US NFIB small business sentiment is an interesting pointer on activity, but no market mover. Several ECB (Rehn, Lane, Vasle, Vujcic, Schnabel) and Fed (Jefferson, Williams) members are scheduled to speak. Markets will also keep a close eye at a meeting of US president Biden with Congressional leaders on debt ceiling. At least for now, there are no clear signs of a break-through. Later this evening the US Treasury will sell $40 bln of 3-y notes. After yesterday’s rebound in yields, we expect markets to take a wait-and-see approach ahead of tomorrow’s US CPI data. Lingering uncertainty on the US banking sector and on the debt ceiling will probably prevent any sustained comeback of the dollar. UK BRC retail sales this morning were reported at 5.2% Y/Y (from 4.9). Sterling maintains its recent gains (EUR/GBP 0.8715 area).
News Headlines
Chinese export growth decelerated in April, slowing down from 14.8% to 8.5% y/y in USD terms. While that’s slightly better than the 8% expected, favourable base effects play a role as well with Shanghai and other parts of the country under lockdown in the same period last year. Exports are expected to ease further as the effects of aggressive monetary policy tightening on global demand kick in. Vehicles printed by far the biggest surge (+195.7%), followed by ships & boats (+79.2%) and packages & containers (+36.8%). Imports slumped 7.9% in April, well surpassing a -0.2% estimate. The decline was broad-based across categories. While there’s some effect of sharply lower energy prices on import prices (thus lowering the import value), it still adds concerns to China’s post-lockdown demand recovery. China’s yuan trades a tad weaker this morning. USD/CNY rises toward 6.92.
The Polish zloty’s closing level yesterday was the strongest since the Russian invasion. At EUR/PLN 4.56, the currency pair does hit quite strong support which in case of a break paves the way for a return to the 2022 lows at around 4.50. Sentiment regarding the Polish currency improved materially in recent weeks after having lagged peers for much of 2023. The country’s external balance has been improving sharply lately, inflation in April finally started to ease and Poland’s ruling party last week introduced legislation in a bid to unlock a stalemate at the country’s Constitutional Tribunal. The latter, on President Duda’s request, is reviewing a proposed judiciary overhaul needed to access EU pandemic funds even though it has already been approved by parliament back in February. The stronger zloty is likely to be welcomed by the National Bank of Poland as it helps the fight against inflation. The central bank kicks off its two-day meeting today.
