Markets
Markets on both sides of the Atlantic are in need of a new trading narrative. The current inflation uptick and even some higher future inflation is discounted. Measures of inflation expectations (e.g US and EMU 10-y inflation swaps) even ease slightly off the highest levels since 2014 reached mid-May. Real yields are also still capped by ongoing massive central bank bond buying. The debate on some (admittedly tentative and extremely gradual) CB tapering might start soon, potentially supporting a bottom in real yields. However recent central bank guidance and, to a lesser extent eco data, were not enough for markets to raise bets on interest rate normalization. Today’s data were no exception. In Europe, EMU Q1 GDP growth was upwardly revised from -0.6% Q/Q to -0.3% Q/Q. Good, but old news. Current conditions in the German ZEW confidence improved to a better than expected -9.1 from -40.1, indicating a positive assessment on the reopening of the economy. The expectations component eased slightly from 84.4 to 79.8 even as ZEW didn’t draw any negative conclusions yet. Similar slightly ‘indecisive’ narrative came for the US NFIB small business confidence, easing from 99.8 to 99.6 (101 expected). Activity is expected to improve further, but inflationary pressures are ever more resulting higher selling prices. At the same time, firms aren’t able fill vacancies and raising wages, potentially eroding earnings. No clear directional news and ongoing low volatility these days also tends to support core bonds. The US curve bull flattens with yields declining between 0.4 bp (2-y) and 3.75 bp (10-y). The US 10-y yield is testing intermediate support at 1.52% ahead of 1.47% (early May payrolls spike). Most of the decline is due to a further easing of inflation expectations. We don’t expect today’s $ 58 bln sale of 3-year Treasuries to disrupt current calm on the (US) bond markets. We keep a closer look at investor interest in the 10-y (tomorrow) and 30-y (Thursday) auctions after recent decline in yields. German yields show a similar move, declining between 0.4 bp and 3.2 bp (30-y). The German 10-y yield dropped below the -0.20% barrier. 10-y intra-EMU spreads against Germany are little changed expect for Greece (+8 bp). The country mandated banks for a reopening of its existing 10-y bond. Italy today sold € 10 bln of a new Dec 2031 bond, attracting more than € 65 bln of orders. EMU and US equity indices are holding near cycle or even all-time highs. Easy financing conditions supporting risky assets shouldn’t come as a major surprise. Still, the current stretch of near record equities and declining yields at this point in the eco cycle is at least a bit remarkable.
No important moves today in the major USD cross rates. The trade-weighted index is going nowhere just north of 90. EUR/USD is changing hands in the 1.2175 area. At least today, the dollar doesn’t suffer from the further decline in US yields. Sterling slightly underperforms the dollar and the euro, with EUR/USD regaining the 0.86 pivot.
News Headlines
Czech retail sales excluding autos rose by 7.5% y/y in April, following an upwardly revised 9.2% y/y in March. On a monthly basis, they were up 0.7% with surges in sales for non-food goods (2.8% m/m) while sales for food decreased by 2.4% m/m. A low comparison basis of April 2020 as well as gradually launched sales over the Internet by many brick and mortar stores contributed to the y/y growth of sales of non-food goods. April data were both this and last year influenced by restrictions or complete closures of stores. EUR/CZK today again tested the cycle low at 25.38.
The Bank of England today published the Climate Biennial Exploratory Scenario (CBES) to explore the financial risks posed by climate change to the largest UK banks and insurers. The CBES uses three scenarios of early, late and no additional action to explore the two key risks from climate change: the risks arising from the significant structural changes to the economy needed to achieve net zero emissions – ‘transition risk’ and risks associated with higher global temperatures – ‘physical risks’. The CBES is an exploratory exercise. It will not be used by the Bank to set capital requirements. The exercise should help the BoE and participants get experience and expertise in modelling climate-related risks. Results are expected in May 2022.
