Markets
US Conference Board consumer confidence crushing consensus was yesterday’s main event. The headline indicator jumped from 109 to 121.7 (113 expected), solely the result of a dramatic improvement in the assessment of present situations (110.1 to 139.6). Digging deeper still, we notice the sharpest confidence recovery in present labour market conditions in more than 40 years of data collection. Wall Street ignored. Equity investors awaited Q1 after-market results of big tech companies instead. US bond yields trended higher throughout the day. The 10-y yield (+5.6 bps) decisively pushed through 1.59% resistance, kickstarting a technical acceleration that brought it to 1.62% at the close. Yield dynamics show a (commodity driven?) rise in inflation expectations. Several gauges reaching the highest level in 8 years. Other bond yields amount to +1.2 bps (2-yr) to 5.2 bps (5-yr) over 5.4 bps (30-yr). German yields finished a dull session flat. Higher US yields mainly supported USD/JPY (closed at 108.7 from 108.08). Narrow rangebound EUR/USD trading ended the day at 1.209. EUR/GBP (flat just south of 0.87) was equally uninspiring.
Disappointing Australian Q1 inflation (cf. infra) is capturing most of the attention this morning in otherwise quiet trading ahead of the Fed meeting tonight. The Aussie dollar underperforms as a result. The kiwi and US dollar take top places on the FX scoreboard. EUR/USD (1.2074) is trending south. Core bonds head lower, with Treasuries underperforming the Bund. US yields advance up to another 2 bps (10-yr).
Today’s attention is centered around the Fed policy meeting, which comes without new forecasts. We don’t expect major policy changes. In the March meeting Minutes, chair Powell noted that it might be appropriate to adjust the interest rate on excess reserves (IOER), the amount the Fed pays on its facility for overnight reverse repos or both to stem recent downward pressure saw that time around. While possible, we note that very short-term market rates since then broadly stabilized. Powell will likely strike a more optimistic tone in the press conference given strong economic data. But guidance on tapering at this stage is unlikely, even as March CPI inflation spiked to 2.6% y/y. Powell will fend off any questions alike playing the “temporary” and “still a long way from the Fed’s goals” card. Nonetheless, a more upbeat assessment could, along with yesterday’s technical break, give additional support to US yields. The dollar might get some reprieve in the short run. EUR/USD failing to take out resistance around 1.21 over the previous days also helps. We look closely at EUR/USD 1.202 support (23.6% retracement of April strengthening).
News headlines
Q1 inflation in Australia in rose at a much slower pace than expected 0.6% Q/Q and 1.1% Y/Y. The closely monitored trimmed mean measure even declined from 1.2% Y/Y to 1.1% Y/Y, the lowest on record, and remains far away from the RBA’s 2-3% target range. According to the ABS, low inflation was amongst others due to a number of government schemes and grants, resulting in price falls for new dwellings and tertiary education. The Australian dollar dropped immediately after the CPI release, but reversed part of the decline, currently trading in the 0.7745 area. The 3-y yield dropped 3 bp to 0.30%. The 10-y yield eased only slightly (1.73%).
The Hungarian Central Bank left the central bank base rate at 0.60% and the overnight deposit rate at -0.05%. The Hungarian economy is seen resilient to the third wave of the pandemic, but activity is still expected to have contracted in Q1. Inflation (3.7%, headline; 3.9% core in March) will remain highly volatile in the coming months and might reach 5% in the second quarter. Still, the MNB sees inflation moving to the Bank’s tolerance band (3% +/- 1.0%) from the summer. Average annual inflation is expected in the range of 3.8-3.9% and core inflation is seen around 3%. The MNB sees the increase in risk aversion vis-à-vis emerging markets and potential second-round effects following the restart of the economy pose the greatest risk to the outlook for inflation. The Bank will maintain the difference between the base rate and the one-week deposit rate as long as warranted by inflationary risks.
