Markets
US markets are closed for Memorial Day today, putting the spotlight on first national inflation figures from several EMU countries in May. The monthly inflation dynamic accelerated again in Spain (0.7% M/M), Belgium (0.77% M/M) and Germany (1.1% M/M), resulting in fresh multidecade peak levels for Belgium (8.97% Y/Y) and Germany (8.7% Y/Y). The price pressure outpaced market expectations. Spanish core inflation reached a new high at 4.9% Y/Y, pointing to the broadening inflation problem. Today’s numbers imply that the euro zone figure will easily pass the 8% Y/Y bar from 7.5% Y/Y in April and compared with 7.8% Y/Y consensus. The national inflation prints immediately put selling pressure on European bonds across the complete curve. German yields add 7.5 bps (30-yr) to 10.5 bps (5-yr). The 2-yr yield sets a new cycle high at 0.45%. The German 10-yr yield escapes on the upside from a closing triangle pattern, paving the way back to the May recovery high at 1.19% and longer term resistance at 1.24% (38% retracement on 2008-2020 decline). 10-yr yield spread changes vs Germany are broadly unchanged with Italy underperforming (+3 bps). European money markets added to their ECB policy tightening bets. The Euribor 3-month forward curve shifts up to 10 bps higher for the Sep2023 contract with expectations for the policy rate peak now shifting from 1.5% towards 1.75%. Markets also very cautiously start betting on the possibility of an increased pace in the ECB tightening cycle in September. ECB chief economist Lane, amongst the most dovish governors, calls increases of 25 bps in the July and September meetings as the benchmark pace. ECB Lagarde in last week’s blog post didn’t rule out an acceleration by framing it as exiting negative interest rates by the end of the third quarter and stressing that pace and overall scale of interest rate hikes cannot be determined ex ante. The euro made a new attempt to take out support-turned-into-resistance at 1.0758. Despite the significant interest rate support and the absence of US investors, a firm break didn’t occur yet. The pair set an intraday high at 1.0780. The March low of 1.0806 immediately arrives as next resistance. EUR/GBP is only marginally stronger, flipping sides around the 0.85 big figure. European stock markets opened strong on the back of Friday’s WS gains and this morning’s constructive Asian session, but failed to build momentum given the bond sell-off. Main indices currently record 0.5% gains. The EuroStoxx50 nevertheless trades above the incoming downward trend line since the start of the year. A confirmed break makes the picture more neutral short term with recovery potential towards slightly above 4000 (62% retracement on YTD move and end of March high.
News Headlines
Belgian national inflation accelerated from 8.31% in April to 8.97% Y/Y in May (0.77% m/m). The fastest price increase since August 1982 wrongfooted those hoping the stabilization in April preceded a topping out process. Energy (+4.8 ppts) and food (+1.26 ppts) were among the biggest contributors. That said, inflation stripped for these two categories, also quickened from 4.08% to 4.43% with prices in the services sector advancing ever more rapidly (4.31% from 3.96%). Rents rose by 2.93%, more than the 2.62% last month. Measured by European standards, Belgian harmonized CPI came in at 9.9%, nearing the double digits for the first time since the series began in 1992.
Swedish real GDP contracted by 0.8% q/q in the first quarter of the year, more than the 0.4% analysts expected. It follows an upwardly revised 1.2% in 2021Q4. Sweden’s economy is still 3% bigger than one year ago. All components weighed on growth: exports rose 1% q/q but was more than offset by searing imports (2.8%), resulting in a negative net export contribution (-0.7 ppts). Household and government consumption fell 0.4% and 0.3% respectively while capital formation contracted by 1.3%. Despite falling below their growth estimates, the figure today won’t throw the Riksbank off track. Inflation (6.4% in April) became a top priority for the central bank. It started raising rates last month and will do so at least at every of the remaining policy meetings this year. The Swedish krone strengthens marginally to EUR/SEK 10.51 today. Swedish swap rates add 3.7 to 5.8 bps across the curve, lagging the EU move.
