Markets
The EU 10y swap rate pierced through 0.11% resistance. For good this time it seems, after the Fed-triggered swoon in US yields prevented a break yesterday. This move to new recovery highs paves the way to more important resistance in the 0.21%/0.24% resistance zone where a trio technical levels meets: the previous all-time low (2016), the 2019/2020 tops and 38% retracement on the 2018-2020 slide. Stellar EZ April economic confidence (110.3 from 100.9; highest level since September 2018) backed today’s rise. Regarding the 0.21%/0.24%-zone, we believe that the economic revival narrative in combination with (temporary?!) higher inflation and stepping down ECB asset purchases will do the trick in coming months and perhaps even sooner rather than later. European real yields are bottoming out and have some way to recover from all-time lows set in March. The technical picture for the German 10y yield is similar after breaking above -0.20% resistance today. The next targets -0.15%/-0.14% are both nearby and key. The German yield curve bear steepens in a daily perspective with yields adding 0.9 bps (2-yr) to 5.4 bps (30-yr). 10-yr yield spread changes vs Germany barely moved. US yield rise by 0.6 bps (2-yr) to 6.3 bps (10-yr), confirming our gut feeling that yesterday’s post-FOMC reaction wouldn’t run that far. It remains too big of a stretch to both embrace an unprecedented economic revival and stem expectations that this could lead to a more sustained inflation pick-up and/or gradual unwinding of very accommodative monetary policy. The timing of Powell’s press conference was also rather unlucky, coinciding with Biden’s “ready for take-off” speech. The US economy in any case started the year on a solid footing with Q1 GDP data coming in at 6.4% Q/Qa. The fiscal stimulus deployed in the US gives a big push in the back but burns holes through the Treasury’s pockets as well, lifting inflation expectations towards 2.5% for the first time since 2013. FX markets are rather stoic today. The greenback fights to live another day. The trade-weighted dollar holds above sell-off lows near 90.50. EUR/USD changes hands at 1.2115, so far holding yesterday’s return above 1.2103. The Japanese yen is today’s weak link on the FX market. JPY can’t fight the rising EU/US rate environment. USD/JPY trades around 109.20 from an 108.60 open. EUR/JPY builds on the technical break above 130.67 earlier this week and currently already settles at 132.20
News Headlines
The Turkish central bank (CBRT) published its first inflation report under governor Kavcioglu. The CBRT expects inflation to finish 2021 at 12.2%, more than the 9.4% penciled in by his predecessor Agbal. Inflation is expected to have peaked in April, Kavcioglu pointed out in the press conference. The governor nonetheless said the CBRT will maintain a tight policy stance so that inflation is to cool down to 7.5% end 2022 (vs. 7% earlier), to finally reach its 5% target in 2023. Kavcioglu also explained a phrase from the previous monetary policy statement in that the key policy rate (19%) will be kept above both actual and expected inflation, whatever the highest, to maintain a strong disinflationary impact. The lira briefly strengthened but pared gains soon. EUR/TRY flirts with the historically low 10.
France will ease the coronavirus measures in four stages from May 3 to June 30, Le Parisien reported, citing president Macron as saying in an interview. A first phase starts on Monday and will include lifting curbs on domestic travel. The curfew will be pushed back several hours from May 19, when cinemas, museums and café and restaurants are also allowed to reopen, to completely end on June 30.
Belgian GDP unexpectedly grew 0.6% q/q in the first quarter of this year despite mostly tightened restrictions during that period. This follows a -0.1% decline in 2020Q4. Compared to the same quarter a year earlier, which saw the first impact from the Covid crisis, growth was still down 1%, also meaning that the pre-pandemic GDP level hasn’t been reached yet. The first growth estimate only contains a sectoral divide. The industrial sector grew 1.3% q/q, putting services (0.2% q/q) and construction (0.1%) in rear-view mirror.
