Sunset Market Commentary

Markets

UK Gilts underperform German Bunds and US Treasuries today following the release of UK labour market data. Employment rose by 169k in the Dec 2022-Feb 2023 period compared to Sep-Nov 2022. The UK employment rate rose from 75.6% to 75.8% over that period, driven by part-time employees and self-employed workers. The timeliest estimate of payrolled employees for March 2023 shows another monthly increase, up 31k (vs 48k expected). The unemployment rate for Dec-Feb ticked up by 0.1 percentage point to 3.8%, matching the pre-pandemic low (vs multi-decade low of 3.5% in August 2022). Growth in average total pay (including bonuses) was 5.9% and growth in regular pay was 6.6% among employees in Dec-Feb. Both significantly beat consensus of respectively 5.1% and 6.2% with upward revisions to last month’s data. Ongoing tightness of the UK labour market and strong(er) wage growth suggest that the Bank of England won’t be able to let its guard down already in its inflation battle. UK money markets are now close to pricing a full 25 bps rate hike at the May 11 policy meeting with an additional 25 bps increase discounted over during summer months. UK Gilt yields add 4.1 bps (30-yr) to 7.2 bps (3-yr) today. Daily German yield changes vary between +1 bp and -1 bp. US yields trade 2 to 3 bps lower across the curve. European eco data today were confined to German April ZEW investor sentiment. The current situation index improved more than forecast from -46.5 to -32.5, but forward looking expectations fell back from 13 to 4.1. The deteriorating outlook comes on the back of concern about the banking sector and elevated inflation. US housing figures turned out a mixed bag with March housing starts declining only by 0.8% M/M (vs -3.5% expected) but building permits fell a larger-than-forecast 8.8% M/M. From central bankers, we retain comments by St. Louis Fed Bullard who is in favour of more rate hikes (plural), adding to the recent more hawkish tone from the likes of Fed Waller and Barkin.

Sterling outperformed slightly in FX space with EUR/GBP extending yesterday’s rather strange slide. The pair currently changes hands around 0.8815 from an open at 0.8830. Gains for cable are bigger (1.2435 from 1.2375) with dollar fatigue adding to the picture. EUR/USD rose from around 1.0920 to an intraday high at 1.0980. Global risk sentiment is still EUR/USD supportive with main European equity indices winning 0.5-1%. Key US indices open from little changed (Dow) to 0.50% higher (Nasdaq). The Eurostoxx 50 (4405) is close to testing the 2021 top at 4415.

News & Views

According to the UK government’s Insolvency Service, the number of UK firms going belly up jumped to the highest level in at least four years. Monthly data collection only began in January 2019. But with a toll of 2 457 in March, numbers nevertheless reveal the impact of surging interest rates and energy bills on firm’s finances. Compared to a year earlier, failures were up by 16%. Annual data, which have been collected over a much longer period, showed that insolvencies in 2022 (22 109) were at their highest since 2009. In the wake of the pandemic, the UK government protected companies from going bankrupt as the country went into lockdown for an extended period of time. These measures however were largely removed in 2021.

Canadian March inflation was broadly in line with analyst’s and the Bank of Canada’s April estimates. Headline prices rose by 0.5% m/m to be up 4.3% y/y. That’s a sharp cooldown from the 5.2% in February following sharply retreating energy/gas prices and favourable base effects. Food price increases eased from 10.6% to 9.7% last month. Core CPI inflation also ticked lower, between 4.4% and 4.6% depending on the gauge, but to a much lesser extent than the headline figure. The Canadian central bank last week kept the policy rate stable at 4.5% for a second meeting straight. The wait-and-see is based on expectations for (core) inflation to come down over the coming months but could still flip into further tightening if that doesn’t happen (sufficiently). Canadian money markets assume the BoC has already hit the terminal rate and instead start discounting rate cuts for end 2023/early 2024. The Canadian dollar is unfazed by today’s CPI outcome. USD/CAD trades virtually unchanged around 1.338.