Sunset Market Commentary

Markets

Fed Chair Powell yesterday rubberstamped a delay of the inaugural Fed rate cut as inflation doesn’t provide the confidence needed to ease policy anytime soon. Yields yesterday still gained a few bps, but today markets came to a short term evaluation point. US yields change between -5 bps (5 & 10-y) and -3 bps (2-y). With markets positioned for a first Fed rate cut in September (90% discounted) and trading indecisive on a second additional cut by year-end, probably new ‘outspoken’ data is needed to start a next directional move. 5% looks like a hard barrier for the US 2-y yield. Upside inflationary risks due to geopolitical developments (e.g. higher prices for oil or other commodities) might affect yields at longer maturities first as the bar is high for markets to contemplate additional Fed rate hikes. Even with today’s ‘pause’, the technical picture/trend in US long-term yields (10-y 4.63% and 30-y 4.75%) is still pointing north. EMU March CPI was confirmed at 0.8% M/M and 2.4% Y/Y for headline and 2.9% for core. For now, EMU inflation doesn’t obstruct the ECB’s intention to start cutting rates in June. However, as is the case in the US, the path for EMU inflation might become more bumpy after the April figure. Changes to German yields stay limited with the 2-y adding 1 bp while the very long end (30-y) declines modestly (-2.5 bps). Question remains how much room there is for the ECB (and many other CB’s) to start and continue an autonomous easing cycle as the Fed’s on hold for longer. Markets currently discount ECB rate cuts at the meetings with new projections (June, September, December). The here risk remains for further push-backs, leaving the downside in EMU yields well protected. EMU swap yields yesterday tested/briefly pierced the top of this year’s sideways consolidation pattern (2-y 3.31%, 10-y 2.83%). Yields at longer maturities stay low if the ECB would be pushed to a higher/less easy for longer scenario later this year. Equities try a cautious rebound after their recent setback (Eurostoxx +0.9%, S&P 500 +0.4%). Still, higher real yields probably set the stage for more sell-on-upticks price action. Oil eases further below $90/b ($89.25). The dollar also takes a pause after the recent rally (DXY 106.25, EUR/USD 1.0635, USD/JPY 154.65).

UK March inflation data this morning eased further, but at a slower than expected pace. Headline inflation rose 0.6% M/M and 3.2% Y/Y (from 3.4%). Core inflation also slowed less than expected to 4.2%. Services inflation stays stubbornly high at 6% Y/Y. At the March BOE meeting, MPC members Mann and Haskel no longer pushed for an additional 25 bps hike, focusing the debate on the timing of rate cuts. Today’s (core) data suggest, that it won’t be easy for the BoE to start cutting rates before summer. BoE’s Greene admits that the UK inflation is headed for a bumpy road. Sterling briefly gained post the CPI data, but again trades in well-known territory near EUR/GBP 0.854.

News & Views

South African inflation in March eased a little more than expected. Prices rose 0.8% M/M (consensus 0.9%). Yearly CPI eased to 5.3%. Core gauges eased marginally from 5% to 4.9%. The central bank (SARB) raised the policy rate 10 consecutive times and kept it at 8.25% since May. With CPI above the 4.5% midpoint of the target range for more than a year, today’s numbers are unlikely to trigger a rate cut anytime soon. Moreover, inflation is expected to pick up in Q2 on stronger oil prices. The SARB expects inflation to moderate towards target by end of 2025. The prospect of the Fed keeping rates higher for longer should also deter the SARB from cutting quickly. Even as the fall-out of king dollar on the ZAR stayed limited compared to other EM peers, the rand does trade weak in a broader perspective. USD/ZAR yesterday regained the 19 barrier. This compares to the all-time ZAR low of 19.92 in June 2023.

The Hungarian forint outperforms CE peers today. Regional currencies perform better after a recent beating driven by risk aversion and soaring core bond yields. But comments from the central bank’s chief economist may have helped HUF. Zsolt Kuti in an interview with the business news website Portfolio said the role of the forint has become more important in setting monetary policy. This importance is driven by the risk of euroization, its effect on inflation – which he forecasts to be above 4% from May to the end of the year – and debt as well as on growth, he said. EUR/HUF eases to 393.14 currently, down from >395. The Polish zloty is second today. The government late yesterday announced it will raise the price cap on electricity prices by about 20% from July on. While the effects on inflation remain to be seen (guesstimates go as high as adding 1 ppt), it probably cements the case for the central bank to keep rates steady through 2024. EUR/PLN dropped from 4.37 at the open to around 4.35 currently.