Markets
Since mid-last week, the ‘inflation hype’ on global markets eased. Trees don’t grow to the sky. After an almost uninterrupted rise since the autumn, measures of financial inflation expectations were ripe for a pause. This was also visible in some commodities/broader commodity indices. The Fed narrative on inflation was a bit mixed of late, with the Minutes showing that some Fed members are ready to start the debate on tapering. On the other hand, markets yesterday saw another almost coordinated effort from Fed governors repeating their view on the temporary nature of inflation and the need for ongoing policy support. Probably not much is needed for inflation stress to come to haunt markets again, but at this juncture markets felt OK not to fight comforting centrale bank comments. US bonds are an area of remarkable calm, with US yields declining up to 1.5 bp (30-y). A similar calm finally also reached European bonds markets. After a period of Bund underperformance versus Treasuries, German/EMU yields finally also ease of recent cycle ‘peak’ levels. The German curve declines between 0.2 bp (2-y) and 2 bp (10-y). The German 10-y yield returns to the previous range top of -0.15%. Regarding the data, the German IFO busines climate index improved more than expected to 99.2 from 96.6, with both current conditions and expectations beating expectations but that didn’t change a benign interest rate environment. The calm on core bond markets also comforted EMU peripheral markets with 10-y intra-EMU spreads versus Germany easing up to 3 bp for the likes of Italy and Greece. Gains on European equity markets are not really excessive (about 0.50%). Still, the EuroStoxx50 touched a new cycle top. US indices also extend yesterday’s rebound opening with gains of up to 0.55% (Nasdaq).
An easing of global inflation stress in theory might also be USD supportive, e.g. as the US currency might draw some comfort from softer commodities. However, this storyline currently doesn’t work. The correction of US nominal and real yields finally pushed the dollar to/through next support levels. The DXY TW index is testing the 89.70 support. EUR/USD, after several unsuccessful attempts, finally clear the 1.2243 previous top. A sustained break brings the 1.2349 January top on the radar. The move mainly mirrors USD weakness, but some underlying euro strength is probably also still at work. In line with comments from ECB’s Lagarde on Friday, ECB’s Villeroy today reconfirmed the bank’s commitment on policy accommodation. At least for now it doesn’t prevent some by-default euro strength. USD/JPY tries to regain the 109 barrier. EUR/JPY is setting a new cycle top north of 133.50, illustrating the idea of underlying euro strength. EUR/GBP extended its journey in north in the 0.86 big figure (currently 0.8665). Cable initially filled offers north of 1.42, but later fell prey to profiting taking.
News Headlines
The Hungarian central bank kept its base and overnight policy rates stable at 0.6% and -0.05%. The MNB struck an optimistic tone with economies, including Hungary’s, reopening after containing the latest wave of the pandemic. Growth this year is now seen in the upper range of the March 4-6% projection band. The MNB thinks upside risks to inflation have increased as commodities and freight costs soared and labour market capacities have tightened (creating wage pressure) in certain sectors. It added that the June Inflation Report will be pivotal in assessing the outlook for inflation in a hint at potential tightening action. Markets were on the lookout for such language after the deputy governor Virag last week suggested the MNB was readying for such a move. For today, the Hungarian forint loses slightly against the euro to EUR/HUF 348.8 but remains the regional outperformer.
The UK’s Office for National Statistics projected a £31.7bn shortfall for the budget deficit in April, in line with median forecasts, as the fiscal year 2021-2022 started. Total borrowing for the fiscal year is expected to total 200bn pounds, or about 10% of GDP. Last year’s budget deficit amounted to a peacetime high of 14.3% GDP or £300.3bn. The statistics office still expects a 3% deficit for the fiscal year 2025-26, casting doubts on Chancellor Sunak’s pledge to balance day-to-day spending and revenue by the middle of the decade without increasing taxes.
