Markets
Trees don’t grow to the sky and even sustained markets trends at some point need a breather/correction. ‘Reculer pour mieux sauter.’ Probably that‘s what happened today, concluding a month with sustained trend moves in equities, commodities and a protracted USD correction. Today’s (EMU) data also didn’t have the same leverage to move markets compared to US data published earlier this week or the Fed policy decision on Wednesday. EMU Q1 growth contracted at -0.6% Q/Q resulting in activity still 1.8% lower compared to the same period last year. The figure was ‘better/less negative than expected’. However, recent data already suggested better resilience of the economy to new containment measures. Whatever, the key point for markets is what to expect on the pace of the recovery (and implications for monetary policy) going forward once restrictions are eased. In a similar way, EMU price data also failed to inspire trading, with headline inflation rising from 1.3% Y/Y to 1.6%, but core inflation still stubbornly low at 0.8%. European equities failed to capitalize on a solid WS close yesterday but most indices stay within reach of recent top levels. WS opens about 0.5% lower. A less buoyant risk sentiment and uninspiring EMU data block the rise EMU yields as high profile technical resistance is under test. However, at 0.13% for the 10-y EMU swap yields, the odds are still for a retest of the post pandemic top/early 2020 peak near 0.25%. Similar story for the German 10-y yield at -0.20% versus key resistance in the -0.15% area. In a daily perspective, Bunds yields are easing between 0.8 bp (2-y) and 1.8 bp (5-y). 10-y Intra-EMU spreads versus Germany don’t tighten anymore with the likes of Italy again 2 bp wider. US yields are little changed (less than 1 bp higher). US spending and income data were close to expectations. The closely watched core PCE deflator rose from 1.4% Y/Y to 1.8% Y/Y. Next week’s early month data, including the ISM’s and payrolls might decide on the next directional move.
April brought strong headwinds for the dollar as investors considered quite some US good news discounted, giving room for a catch up reposting for the likes of the euro, the loonie or the Aussie dollar. EUR/USD rebounded from the 1.17 area to (temporaryil?) surpass the 1.2103 resistance this week. At yesterday’s close, the DXY loss for the month was near 3%. Today’s market story providing no additional fuel for the reflation narrative was a good reason for end of month profit taking on USD shorts. EUR/USD dropped again below the 1.2103 pivot, currently trading at 1.2085. DXY recovers to trade near 90.85. As is the case for US yields, next week’s data might decide whether there is room for more rebalancing in favour the US currency. For now, the technical picture for the dollar remains fragile. There was no end of month countermove for EUR/GBP after this month’s rebound even as markets are pondering whether the BoE will already start the debate on APP tapering at next Thursday’s meeting. EUR/GBP trades in the 0.8710 area, with the key February 0.8731 top within reach.
News Headlines
Polish inflation in April accelerated to the highest pace since March last year. Headline price increases amounted to 4.3% y/y, breaching the upper tolerance band of the National Bank of Poland’s 2.5% +/- 1ppt target. Inflation was supported by base effects and a steep increase in fuel prices. Figures on core inflation aren’t available yet but are estimated to have risen to 3.5% y/y. The increase came even as Poland has yet to ease its very strict corona measures, potentially firing up inflation further. These numbers put the NBP’s pledge for very low rates at least until 2022 at ever more pressure. The central bank meets next week.
Czech GDP contracted 0.3% q/q in the first quarter of this year. That’s less than the -0.8% q/q expected. Compared to the same period last year, Czech GDP fell 2.1%. The pandemic measures ravaged through the services sector and tourism in particular. In contrast to the previous quarters, the industrial sector was less of a counterbalance as components supply shortages held a lid on production. Together with next week’s PMI and retail sales, GDP figures are the final input for the Czech National Bank’s policy meeting on May 6.
