Markets
The April US CPI release was the key focus for global trading yesterday. However, as was often the case of late, the market reaction was influenced at least as much by the reigning market bias rather than the data. With headline and core inflation at 0.4% M/M-4.9% % Y/Y and 0.4% M/M-5.5% Y/Y respectively, the easing in inflation was negligeable. A core services measure stripping out energy and housing, eased to 0.1% as was seen as a pointer for a future decline in core inflation. Higher energy and goods prices were given less weight. Whatever the assessment on the details, markets (in our view prematurely) took report as supporting the view that a Fed pause might evolve toward the end of the tightening cycle and even lead to rate cuts in H2, even as Fed governors still dismiss this scenario. US yields declined between 11.2 (2-y) and 4.2 bps. The bond rally even accelerated going into a $35 bln 10-y auction, but momentum faded after the sale (awarded 3.448% vs 3.439% WI and close to average bid-cover of 2.45). German yields at a distance followed the US decline, but with no outspoken curve move (about 6.0 bps decline across the curve). Market rumours referring to people familiar with the debate were quoted that ECB officials are starting to accept a scenario were rate hikes might continue until the September meeting. Equities intraday rebounded immediately after the CPI release but price action remained choppy (EuroStoxx50 close -0.38%, S&P500 +0.45%, Nasdaq +1.04%). The dollar lost modestly but closed of the intra-day lows (DXY 101.48, EUR/USD 1.0982).
The calendar contains US PPI and jobless claims. We only expect them to be of intraday significance for trading, with the market still more sensitive to softer rather than stronger data. Plenty of ECB members are scheduled to speak. The US will sell $21 bln of 30-y bonds. For now, the ST upside in US yields probably remains limited. The picture for the US dollar remains unconvincing. Stubbornly high inflation, strong labour data and indications that the setback in the UK economy might be milder than previously expected will ‘force’ the Bank of England to raise its policy rate by 25 bps to 4.5%. We expect the Bank to keep its conditional guidance from the March statement (If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required). This still should be seen as a soft message given recent data evidence. Sterling recently succeeded a catch-up move with EUR/GBP breaking 0.8721 support. We look out whether the BoE communication will provide a trigger for a more neutral GBP positioning, maybe even some profit taking.
News and views
The Polish central bank kept rates steady at 6.75% for an eight meeting straight. Activity has slowed down with retail sales, industrial output and construction and assembly output all dropping in annual terms in March 2023. The labour market remains strong though and unemployment is low. Inflation has eased to 14.7% in April. But it remains well above target and is still affected by companies passing through earlier commodity and supply chain-driven cost rises. The NBP remains convinced that the current monetary policy stance, the weakening of external and internal activity and the easing of external supply shocks will support the ongoing, yet gradual disinflationary process. The central bank still welcomes a stronger zloty and retains a pledge to intervene in the FX market should the currency weaken to undesirably low levels. EUR/PLN averaged around 4.7 in the first quarter of this year before impressive zloty strengthening kicked in mid-April that ran all the way to 4.55 earlier this week. The pair broke below that technically important level going into yesterday’s policy meeting with significant follow-through losses (zloty gains). EUR/PLN eventually closed at 5.518 with next zloty-resistance already looming at 4.50.
Chinese inflation eased more than expected. Prices rose at a mere 0.1% y/y, down from 0.7% in March. It’s the slowest pace in two years and even less than the 0.3% expected. Core inflation (ex. food and energy) matched the March figure of 0.7%. While some base effects are at play (inflation shot up in April last year as the Shanghai lockdown triggered new supply chain disruptions and food stockpiling), it also suggests the Chinese economy is not yet going full steam ahead after zero-Covid was buried end last year. Similar evidence came from other data too, including trade figures earlier this week. Speculation is now building that the PBOC may offer additional monetary stimulus. USD/CNY ekes out a small gain this morning but the 200dMA is limiting the scope. The pair is currently trading around 6.93, testing the April highs.
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