Markets
Let’s pick up right where we left-off yesterday: the US manufacturing ISM disappointed, falling from 64.7 in March (highest since 1983) to 60.7 in April (vs 65 expected). Details showed a reversal of the March increase in production (62.5 from 68.1) with companies reporting supply chain struggles as a hampering factor. New orders and employment showed a similar return. Supplier deliveries (75 from 76.6) and backlog of orders (68.2 from 67.5) remain sky-high with (customer) inventories shrinking rapidly. Prices paid rose even further (89.6 from 85.6), closing in on the 2008 high (91.4). Markets reacted slightly disappointed to the release even if the ISM survey tries to tell a story of being willing but unable to shore up production. The US dollar already gave away some of Friday’s gains and dipped to an intraday low after the ISM release. The move lacked real follow-up action. EUR/USD set an intraday top near 1.2075 in the ISM-aftermath, but didn’t push for a retest of the 1.21 big figure. This morning, the dollar even positioned itself back into the driver’s seat in Asian dealings. US Treasuries hovered listless until the ISM release with Japanese, Chinese and UK markets closed, but spiked higher on the release. Unlike on FX markets, this move still stands this morning. US yields shed up to 3.1 bps with the belly of the curve outperforming the wings. German yields eventually closed nearly flat after failing to hold on to initial gains (German Greens frontrunner in election polls). Long term German yields tested resistance barriers (eg 0.38% for 30y yield) but failed a sustained move beyond. 10-yr yield spread changes vs Germany narrowed by up to 3 bps for Italy.
We retain overnight comments by NY Fed governor Williams who countered Friday’s tapering debate suggestion by non-voting Dallas Fed governor Kaplan. Williams says that the expansion of credit, borrowing, leverage etc is nowhere near levels witnessed over a decade ago, suggesting that asset prices currently reflect optimism toward the economic recovery rather than overvaluations. On top, he believes that issues centering around asset prices and financial stability belong to regulation and supervision of financial institutions. Current data are not nearly enough for the FOMC to shift its monetary policy stance, dixit Williams. Markets didn’t react to his comments. Today’s eco calendar is the exception to a busy week. Comments by Fed governors remain interesting, but probably undecisive. A wait-and-see attitude towards the rest of the week should keep main FI and FX markets within technical boundaries. A regional election in Madrid probably won’t impact local markets directly, but could have longer term political consequences, risking slight underperformance of Spanish assets. Sterling trading remains focused on Thursday when the Bank of England meeting and Scottish parliamentary elections both have the ability to finally give new impetus to GBP-trading. EUR/GBP 0.87 resistance easily stands so far.
News headlines
South Korean headline CPI jumped from 1.5% to 2.3% y/y in April, the highest since August 2017. Core inflation rose reached 1.4% y/y from 1%. Favorable base effects, food & non-alcoholic beverages (8.1% y/y) and transport (energy) prices (6,4%) but also the more demand-sided recreation (1.2%) and restaurants (1.8%) added to the upward price pressures. Despite topping the central bank’s 2% target, it will probably consider the uptick temporary with governor Lee Ju-yeal saying last month inflation will moderate after fluctuating around 2% this quarter.
The Reserve Bank of Australia kept policy rates at 0.1% and it will probably stay there until 2024, when the labour market is tight enough to generate wage growth that props up inflation sustainably to within the 2-3% range. Its 3y yield target remains steady at 0.1% as well. It will consider shifting from the current April 2024 target bond to the November 2024 one in July, along with an assessment for future bond purchases. The RBA revised growth upwardly again and employment exceeds the pre-pandemic level. An uneven recovery, however, together with lingering virus uncertainty and below-target inflation warrants a supportive monetary stance.
