Markets
European bond markets started the day still on a solid footing (gap open), betting we’ll see a continuation of yesterday’s trends even as overnight news flow was extremely thin. They soon lost dash though, morphing into sideways trading afterwards. German yield currently lose 6.5 (bps) at the front end and gain slightly at the very long end. US yields are 1.6 bps (30-yr) to 3.1 bps (3-yr) lower. Main European stock markets cede up to 1%, but are also off worst intraday levels. Key US indices are back in positive territory following yesterday short-lived First Republic scare. EUR/USD resumed its uptrend with the pair in a technical acceleration moving beyond the YTD highs in the 1.1070/75 area. First resistance stands at 1.1274 (62% retracement on drop between early 2021 and September 2022). Less liquid crosses like EUR/AUD, EUR/NZD and EUR/CAD are showing similar technical accelerations. EUR/GBP gains are more contained with the pair rising from 0.8842 to 0.8872. Eco data were few and failed to give any meaningful direction. Headline US durable goods orders rose more than expected in March (3.2% M/M) but were diluted by non-defense aircraft orders. Capital goods shipments non-defense ex-aircraft (proxy for investments in GDP calculations) fell 0.4% M/M following a downwardly revised -0.4% M/M in February. German May consumer confidence unexpectedly increased from -29.3 to -25.7 (vs -28 expected), the highest level since April 2022. The German government raised its 2023 GDP forecast from 0.2% in January (and -0.4% in October) to 0.4%. Next year, the government expects growth to accelerate to 1.6%, economy minister Habeck said (from 1.8% in January). Inflation forecasts stand at 5.9% this year (from 6.9% in 2022) and 2.7% in 2024.
Focus now turns to GDP and inflation numbers to released tomorrow and especially on Friday. Tomorrow we’ll see Belgian inflation and US Q1 GDP figures. Friday starts with April Tokyo inflation and the Bank of Japan policy meeting, but the focal point will be French/Spanish/German inflation numbers and to a lesser extent EMU Q1 GDP. The US eco calendar contains March PCE deflators, Q1 employment cost index and Chicago PMI. The data won’t derail Fed plans to lift policy rates by 25 bps next week, but could make or break our base case for a 50 bps ECB hike.
News & Views
Sweden’s central bank jacked up rates by 50 bps to 3.5% today. The increase was necessary to bring back inflation back to the 2% target. Both headline and underlying price pressures eased in March but did so (much) less than the Riksbank anticipated in its February Monetary Policy report. Inflation forecasts as a result were revised upwards, from 5.5% to 5.9% this year and from 1.9% to 2.3% in 2024. Growth this year should be less worse than previously thought (-0.7% vs -1.1%) but 2024 growth momentum was reduced to 0.2% (vs 0.9%). The Riksbank projected another 25 bps rate hike in either June or September to 3.75%. The Swedish krone was disappointed. It hoped for something more, if only because the weak currency (officially) became matter of concern to the central bank since February. It barely left the multiyear lows since then. The fact that two members out of six voted for a smaller hike and a shallower rate path didn’t help either. EUR/SEK retested the 2020/2023 highs around 10.40 after the decision. Swedish swap yields, already down going into the policy outcome, extended declines to almost 15 bps at the front end of the curve.
The European Commission today unveiled proposals to revise the current rules on public spending. These have been suspended in the wake of the Covid and then energy crisis but are set to return next year. Deficit and public-debt limits remain at the familiar 3% and 60% of GDP but individual member states are given greater ownership of their debt-reduction plans. They are required to set out plans with fiscal targets, measures to address imbalances, priority reforms and investments over at least four years. Debt burdens of countries in excess of the 60% threshold will have to be lower by the end of the plan period than at the start while excessive deficits should be reduced at a minimum pace of 0.5% of GDP annually. Some elements of the plan require unanimous member state approval, meaning negotiations could last for months. Germany already expressed concerns about “debt reduction à la carte”.
.){kind=link}