Markets
This morning’s hawkish rate hike by the Reserve Bank of Australia was set to be today’s sole highlight. The central bank unexpectedly raised its policy rate for a second meeting running by 25 bps after installing a pause back in April (Fed, are you listening?). On top, they worry more over upside inflation risks. This might even require some further tightening of policy in the future. The market impact remained restricted to Australian markets despite potentially being a global example. AUD/USD reached its strongest level since the start of the USD-comeback mid-May (0.6685). AUD swap yields added up to 7.4 bps at the front end (2y) with money markets almost completely discounting another 25 bps rate hike by the September meeting.
The eco & event calendar looked extremely dull in Europe and the US, but the ECB’s April Consumer Expectations’ Survey results caught investors by surprise. Although outdated, they managed to nonetheless trigger a market reaction as consumer inflation expectations decreased significantly, reversing most of the increases seen in Q1 this year. The median rate of perceived inflation over the previous 12 months decreased to 8.9% in April 2023, from 9.9% in March. Median expectations for inflation over the next 12 months decreased to 4.1% in April, from 5% in March, and those for inflation three years ahead decreased to 2.5%, from 2.9% in March. Uncertainty about inflation expectations 12 months ahead also decreased. Economic growth expectations for the next 12 months were less negative in April, standing at -0.8% compared with -1% in March. Expectations for the unemployment rate 12 months ahead decreased to 11.2% in April, from 11.7% in March. In the run-up to next week’s ECB meeting, markets obviously zoomed in on the inflation expectations component. While they don’t doubt the ECB’s commitment at the June and July policy meetings, it could result in a more balanced tone by ECB Lagarde at the Q&A session afterwards. German Bunds outperform US Treasuries today with German yields losing up to 4.7 bps at the front end of the curve. Daily US yield changes vary between +1.1 bp (30-yr) and +3.8 bps (2-yr). Loss of interest rate support pulls EUR/USD back below 1.07 (1.0677 currently) with EUR/GBP copying the move to a lesser extend (0.8608). Risk sentiment on stock markets is mildly negative.
News & Views
According to Czech statistical office (CZSO), industrial production in real terms declined 1.9% M/M to be 1.2% higher compared to the same month last year (WDA). According to CZSO ‘the April result of industry was mainly influenced by last year’s low comparison basis in manufacture of motor vehicles. The number of economic activities of industry in which production increased, year-on-year, decreased again. Manufacturing of motor vehicles and trailers increased by 30% Y/Y, but declined 5% M/M. Y/Y production also increased in electrical equipment, in repair and installation of machinery and equipment and in pharmaceutical products. New orders at current prices increased 2.7% Y/Y. Non-domestic orders declined 1.6% Y/Y, but domestic orders increased by 11.3%. Again the rise was mainly due to a low comparison base in the automotive industry last year. The average registered number of employees in industry decreased by 1.7% Y/Y. Their average gross monthly nominal wage increased 9.6% Y/Y. Other data also showed a further decline in construction output (-3.4% M/M and 6.4% Y/Y). Despite mediocre activity data, the Czech koruna remains well bid near EUR/CZK 23.51.
Hungarian retail sales suggest ongoing sluggish domestic demand. Alongside a significant base effect from last year, sales were 12.6% lower in April compared to the same month last year. Sales declined 8.6% Y/Y in food shops, by 10.7% in non-food shops and by 22.9% in automotive fuel retailing. Despite the domestic slowdown, the Hungarian forint holds near recent peak levels (EUR/HUF 368.5). The MNB last month started reducing the O/N deposit rate from 18% to 17%. In the view of the Hungarian central bank this was mainly inspired by a return of financial stability on Hungarian markets (including a solid performance of the forint) rather than by monetary policy considerations (inflation) or as a means to support demand.
