Markets
We’ll start off with the pound for a change. Bank of England’s Vlieghe generally carries a dovish label which makes his comments yesterday about an early rate hike if the labor market recovers smoothly all the remarkable. He balanced the tone of his speech a bit (“downside scenario shows BoE rates going negative”) but that’s not what markets retained from his message. UK gilt yields rose 2.9 bps (2y) to a significant 5.8 bps (10y) as bets on such a policy rate hike increased. Sterling jumped quite substantially. EUR/GBP forfeited the ST upward trend channel, falling half a big figure to below 0.86. Cable finished near the recent recovery highs of 1.42. Bond yields in the US advanced 2-4 bps at the medium and long end of the curve, a move spurred by decent data and president Biden’s leaked plans to propose spending of $6tn (!) in the coming fiscal year, to be raised to $8.2tn by 2031 and leaving gaping holes in the budget of at least $1.3tn each year over the next decade. Signs of US short-term money market rates being squeezed too much and risk decoupling from the Fed’s benchmark rates are building further: usage of the Fed’s reverse repo facility reached a record $485 bn yesterday. German yields joined the US and eked out a 3-4 bps gain at the long end. The German 10y support at -0.20% survived. On FX markets, the dollar hardly profited from the massive spending plans, perhaps eying the monster deficits instead. EUR/USD traded an inconclusive, sideways pattern in the high 1.21 area. USD/JPY did advance towards 109.81 but that was mainly on a weak yen: EUR/JPY jumped beyond resistance around 133.5 to near 134 (the highest level since early 2018) as well. Cyclical stocks profited the most from Biden’s spending ambitions though gains for the DJI remained limited overall (0.41%).
Asian equities trade well in the green this morning. Japan outperforms (+2%) despite disappointing eco data. The Chinese yuan continues to strengthen, now hitting USD/CNY 6.37 and nearing support around 6.36. This is despite an overall solid USD. Core bonds have a minor downward bias.
We’ll be on the lookout for US PCE (core) inflation today. Statistical elements (such as base effects) reached their peak momentum in April and are expected to help push core PCE from 1.8% y/y in March to 2.9% in April. An upward surprise could revive the inflation debate and thus rate hike/taper bets on the Fed. It won’t take long for officials to step in verbally probably. We remain cautious on a sustained dollar comeback (on rising real yields) even in case of an expectations-topping outcome and in the run-up to the long US weekend. EUR/USD 1.2133 provides first support. EUR/GBP is located near technical support of 0.858. A break lower in the wake of Vlieghe’s comments would improve the picture for sterling and pave the way towards the 2021 low near EUR/GBP 0.85.
News Headlines
Japanese data indicated that the economy continues to feel substantial headwinds from new Covid outbreaks. Japan’s jobless rate rose from 2.6% in March to 2.8% in April, rising faster than expected. At the same time, job availability declined with the job-to-applicant ratio declining from 1.1 to 1.09. The situation in the labour market might remain difficult for some time as the government is considering extending the state of emergency to June 20. A separate report showed that prices in Tokyo still declined in May. Headline CPI printed that -0.4% Y/Y. The core measure EX fresh food was stable at -0.2% Y/Y. The 2.0% BoJ target clearly remains far out of reach.
The unemployment rate in Brasil rose to 14.7% in the first quarter of the year, the highest level since the series started in 2012. According to the statistics agency IBGE, the number of people officially unemployed rose to a new high of 14.8 million from 13.9 million in Q4 2020, up nearly 2 million people, or 15%, from a year ago. Some 85.7 million Brazilians had work, little changed from the previous quarter but down 7.1% or 6.6 million people from the same period a year earlier.
