Markets
Core bonds ceded some additional ground today. The move is mainly supply related. The UK Treasury launched its first ever 10-yr syndicated bond, raising £12bn with an order book in excess of £82bn! The US Treasury continues its mid-month refinancing operation tonight with $32bn 10-yr Note sale. This week sees a record $96bn on offer (3-10-30y) with amounts increasing further throughout Q2. The focus is on the longer tenors (7y+). The German Finanzagentur raised €4bn in a 7-yr auction which had a good bid cover (2.3). News flow was otherwise scarce today; European stock markets gain up to 1%, ignoring this morning’s hesitant Asian start. Focus then centered on protectionist measures from the US against China (pull federal money out Chinese stocks) and from China against Australia (suspend large part of meat imports). Oil prices continue to hover near $30/barrel despite Saudi Arabia’s upped efforts to reduce production. It merely shows that the global negative demand shock outweighs the supply side of the equation. Today’s eco calendar contained US NFIB small business optimism and inflation. The headline NFIB index fell less than expected (90.9 from 96.4) in April, but the outcome was still the softest since 2013. Details showed a worrying drop though in real sales expectations in the next six months. US inflation data showed the huge reduction in demand triggered by the coronacrisis. Core CPI fell from 2.1% Y/Y to 1.4% Y/Y (-0.4% M/M) with the headline reading slowing from 1.5% Y/Y to 0.3% Y/Y/ (-0.8% M/M). Details showed declines in most price categories (car rental, airfares, auto insurance, lodging, clothes, fuel …) with food prices being the big exemption. The monthly drop in the core gauge was the biggest since data began in 1957. The cost of services fell 0.3% M/M. Core bonds thus didn’t respond to the (short term) disinflationary spiral. Apart from today’ supply story, they eagerly look forward to comments from Fed governors this week (including Chair Powell) on the slightly negative yields on the Fed Funds Future curve (2021). The Fed and other central banks so far resisted to join the EU/Japanese/Swiss experiment of negative rates. They argue that the negative impact on profitability in the financial sector would weigh on credit supply to the real economy. Dallas Fed Kaplan and St. Louis Fed Bullard already disliked the idea. In this respect, we found some interesting comments by BoE Broadbent who didn’t fully dismiss the possibility of negative rates. He added that “with the risks still tilted to the downside, it’s quite possible that more monetary easing will be needed over time”. EUR/GBP moved higher in its narrow trading band since early April and exceeds the 0.88 mark. The dollar had a rough day as well. The trade weighted dollar failed to break 100.40 short term resistance and retreated back sub 100. EUR/USD rose from an opening around 1.08 to 1.0865 currently.
News Headlines
UK finance minister Sunak announced he will extend the job retention scheme until the end of October but will amend conditions in August. Under the programme, the UK government pays 80% of employees’ wages currently not at work. Costing about £14bn a month, Sunak said it is not sustainable in the long term in its current form.
Kovesi, the chief of the newly created EU Public Prosecutor’s Office warned that the large sums of European aid made available to countries while at the same time maximizing flexibility to ensure a swift distribution procedure is a recipe for a surge in fraud and corruption, adding that she already sees signs of abuse in the execution of Covid-19 (fiscal) responses.
Norwegian mainland GDP growth contracted 2.1% q/q in the first quarter of this year. Private consumption (-3.6% q/q) and capital expenditures (-5.1% q/q) were a major drag on growth while government consumption and trade (as imports fell twice as hard as exports) contributed positively. Including petroleum activities, the growth decline is less pronounced (-1.5% q/q). The Norwegian krona strengthened nonetheless but remains above EUR/NOK 11.
