Market movers today
- Tier 2 data published today. In the US we get weekly jobless claims data and in Germany we have the GfK Consumer Confidence for April.
- In Fed speak it’s Clarida’s turn.
The 60 second overview
Inflation: US inflation is expected to go higher over the coming months largely on the grounds of base effects. The inflation swap market is pricing a two year average inflation of 2.5% with the most recent February reading coming in at 1.7% (note that the inflation market tracks CPI and not PCE, which is the Fed’s target measure). Fed chair Jerome Powell yesterday said that the Fed sees the coming expected high inflation prints as temporary indicating that markets should not put too much emphasis on these when judging on any upcoming monetary policy decisions. The message is in line with US Treasury Secretary Janet Yellen who said two weeks ago that the inflation risk is small and manageable.
Oil: An important headline inflation ingredient remains oil, which has dropped 8% over the past two weeks, although rebounding strongly yesterday. The lower price comes following new lockdowns in Europe and a growing fear that at its meeting on 1 April OPEC+ will choose to normalise supply once again after having kept a lid on output. Also the capacity in US shale oil remains high as drilling activity is only slowly restarting. It should be noted, however, that the long end of the oil forward curve has remained steady at around USD 55/bbl.
Benchmark backlash: In the US, replacing the USD Libor benchmark with SOFR has taken a minor hit, as the committee overseeing the transformation away from Libor has stated that a term version of the SOFR rate cannot be recommended during this year. A term rate would allow the market, and primarily corporates, to operationalize SOFR in the same way as Libor is treated today – i.e. a rate that is known at the beginning of the accrual period. No changes are forthcoming in Denmark and Norway as both Cibor (DKK) and Nibor (NOK) has been deemed non-critical benchmarks. Stibor (SEK), however, is a critical benchmark and a final recommendation on a reformed version is expected this year.
Equities: Equities continued lower yesterday with MSCI world dropping 0.8%. A mixed picture across regions and sectors with Europe outperforming regionally and Energy as big standout on sectors on higher oil price. Small cap had another tough day and the closely watched Russell 2000 index is now almost 10% lower since its peak 8 days ago. US equities repeated the Tuesday pattern by selling off through the afternoon and ending near worst levels. Dow -0.01%, S&P 500 -0.6%, Nasdaq -2.0% and Russell 2000 -2.4%. Asian equities are mostly higher this morning. US futures are green this morning while European once again slightly negative.
FI: Yesterday, the EGB curves bull flattened from the long end. After a sharp decline in yields from the morning with Bunds touching -0.375% which is the lowest in 5 weeks, EGBs gradually sold off through the day amid strong European PMIs, Germany reversed the intended lockdown through Easter. With TLTRO settlement, no new comments from central banks that changes risk sentiment has led to downward pressure on cash bond yields. German Bund-ASW were stable yesterday at 37.5bp yesterday after four days of widening of 3.5bp, to the mid of the new 35-40bp range.
FX: Dollar is strengthening versus most crosses and EUR/USD was little different yesterday as we hit a 2021-low of 1.1810. A few weeks ago, the dollar turnaround was mostly visible by the lack of a firm downtrend in USD/CNH and slightly weak Asian stock markets. Now, however, it’s stronger dollar versus EUR, Scandies, commodity currencies and high beta EM-alike.
Credit: Though CDS indices had a decent day, with Xover tightening 2bp (to 269bp) and Main ½bp tighter (to 54bp), cash bonds were in less demand and HY widened 1bp while IG ended ½bp wider.
