Markets
Core bounds found some reprieve in this week’s second transitory trading session bridging Friday’s payrolls and tomorrow’s US CPI data. German Bunds outperforms US Treasuries after the ECB’s quarterly Bank and Lending Survey provided some more backing for the flagged June policy rate cut. Demand for loans from firms declined substantially, contrary to banks’ expectations of a recovery. A small net decline was reported for housing loans. Credit standards for loans to firms tightened slightly and that trend is set to continue in Q2. Standards eased moderately for housing loans with no profound changes expected in the next quarter. German yields currently cede 2.2 bps (2-yr) to 6.5 bps (30-yr). Changes on the US yield curve vary between -3 bps (30-yr) and -4.5 bps (7-yr). The dollar continues to struggle even as oil prices (Brent) steady above $90/b and risk sentiment is also clueless (Europe -0.5%; WS +0.5%). DXY moves back below 104 for the first time since the March FOMC meeting. EUR/USD similarly eyes 1.09 for the first time since then. Sterling is today’s (odd) outperformer with EUR/GBP a tad softer at 0.8565 and cable moving above 1.27.
The Japanese yen still hovers dangerously close to the USD/JPY 152 level considered line in the sand for officials. People familiar with the matter today suggested that the Bank of Japan will likely consider raising its inflation forecast later this month (Apr 26). The outcome of the annual Shunto wage negotiations (5.24% average; most in over 30 years) is the key driver. Rising energy prices and JPY weakness are other compelling factors. Compared with January, sources suggest that the current fiscal year’s 2.4% (CPI ex fresh food) might be upwardly revised with the first FY 2026 forecast to be around the 2% inflation target. Question remains whether such higher inflation prognosis will speed up the BoJ’s normalization plans after last month’s inaugural dovish rate hike. Markets rightly so didn’t interpret it as being the start of a genuine hiking cycle, putting JPY immediately with the back against the wall. Failure to give clear backing at the April policy meeting risks bringing the currency rapidly into tailspin with possible FX interventions in such scenario likely in vain.
News & Views
The Italian government expects the country to grow 1% this year. That would mark a slight acceleration from the 0.9% in 2023 but a slight downward revision from the 1.2% projected last year. PM Meloni’s cabinet pencilled in 1.2% for 2025. The budget deficit isn’t anticipated to drop below the 3% EU limit until 2026. Last year’s whopping 7.2% shortfall as a result of the so-called “superbonus” for home renovations has heavily impacted the budget update, a government official explained. Because of the large deficits in coming years, the debt-to-GDP ratio would now rise through 2026 and hit a peak at 139.8%. This marks a change in direction from the October projections, which forecasted a decline.
The Kingdom of Belgium successfully launched a €7bn 5y bond (OLO102, October 22, 2029), priced at MS-1 bp compared to initial guidance of MS+1 bp. Books totaled more than €46bn. Based on the 2024 budget plan this was the third and final syndicated sale of the year with the other two carrying a 10-year and 30-year tenor. Today’s syndication included, the Belgium Debt Agency completed just over 60% of its €41bn OLO funding need.
The European Round Table for Industry, a lobby group consisting of around 60 of Europe’s largest companies in the industrial and technology sector, in a new report said there’s a need for €800bn of investments in energy infrastructure alone to meet the 2030 climate targets. Looking further into time and considering Europe’s net zero ambitions by 2050, the price tag rises to a massive €2.5tn, to be channeled to the power grid, energy storage and carbon capture facilities. The Financial Times citing leading industry bodies reported that the private sector alone cannot carry such large investments alone. Government finances, however, are also under strain following the pandemic, energy crisis and a shift in spending priorities towards defense and other industries deemed too critical to be outsourced.
