Markets
Core bonds are rallying like there’s no tomorrow. The peculiar thing is that for a second straight session there’s no direct trigger. Last Friday’s US payrolls report – decent but far from overwhelming – in hindsight turned out to be the starting point of a move dragging into this week. It convinced doubters that nowhere near sufficient progress toward maximum unemployment is made for the Fed to turn even slightly more hawkish at next week’s FOMC meeting. The minority group referring to anecdotic evidence (eg Beige Book) or alternative labour market measures (eg JOLTS) and suggesting a tighter labour market than BLS data suppose, is left in the dark. The Fed will next week talk about tapering and perhaps instruct staff teams to prepare some possible scenarios for after Summer, but market positioning clearly indicates that Powell will stress the Fed’s new outcome-based reaction function. Simultaneously, worries about rising inflation (expectations) are ebbing away even if we might get a near 5% y/y US CPI print tomorrow with core CPI running at 3.5% Y/Y. It’s way too early to consider and not at all our base scenario but what if the inflation bump effectively turns out only very temporary, eating into additional disposable income and implying much softer economic rebound than current envisioned? It would in any case justify the Fed’s sit back and relax approach. The US yield curve bull flattens with yields dropping by 0.6 bps (2-yr) to 5.5 bps (30-yr). Tonight’s US 10-yr Note auction is clearly no issue. Since Thursday evening, yield declines vary between 1 bp (2-yr) and 13.6 bps (30-yr). From a technical point of view, the US 10-yr yield fell below 1.5% for the first time since mid-May. German Bunds follow the direction of US Treasuries with German yields 1.2 bps (2-yr) to 3.6 bps (10-yr) softer in a daily perspective. The reasoning is more or less similar ahead of tomorrow’s ECB meeting. The past two weeks, the narrative changed to an ECB keeping the upped pace of PEPP unaltered instead of returning to the pace at the start of the year. We continue to believe that risks are skewed to lower purchases especially over the Summer period when liquidity tends to dry out. Up until today, the gentle progress of core bonds went hand in hand with steady gains for stock markets. Today’s bond acceleration seems to scare off some equity investors as main EMU and US indices have a tentative downward bias. The dollar is ailing in FX space, losing out against almost every other major. The trade-weighted greenback cedes the 90 mark with EUR/USD retaking 1.22. EUR/GBP follows the move higher from EUR/USD. Hawkish comments from outgoing BoE member Haldane are rightly so ignored.
News Headlines
May headline inflation in Hungary printed at 5.1 Y/Y, unchanged from April and slightly lower than expected. However, inflation remains firmly above the MNB target of 3.0% (+/- 1.0%). Core inflation continued to rise from 3.1% Y/Y to 3.4% Y/Y. This higher core inflation was mainly driven by accelerating price increases in market services, including at restaurants and for events. Tradable goods prices are also rising further. Developments in underlying inflation and recent MNB comments indicated a June rate hike is almost certain. This morning, Vice governor Virag was very explicit as he advocated decisive action to ensure price stability with a first step in the tightening cycle after the 22 June inflation report. This means, the benchmark rate might be increased by at least 30bps, while the one-week deposit rate by 15bps, which might be followed by additional 10-15bps hikes in July and August. The forint rebounded today with EUR/HUF trading near 347. The MT range bottom comes in at EUR/HUF 343.
Inflation in May in Brazil rose 0.83% M/M to be up 8.06% Y/Y, slightly higher than expected. Yearly inflation was at the highest level since September 2016. According to statistics agency IBGE all nine categories of the survey showed higher price compared to the previous month. The central bank aims a year-end goal of 3.75% with a 1.5% tolerance band on each side. The central bank is expected to raise its Selic rate by 0.75% to 4.25% at next week’s policy meeting. At USD/BRL 5.04, the Brazilian real is testing the strongest levels against the dollar for this year.
