Market movers today
A busy week of data releases and central banks kicks off in a quiet fashion. Today we are curious to see whether the US ISM manufacturing index for April reflects similar strength as the PMIs earlier.
Early on Tuesday morning, we expect the RBA to keep monetary policy unchanged in line with market and consensus expectations. We also get euro area flash HICP tomorrow.
On Wednesday, all eyes turn to the Fed, where we look for final 25bp hike. The April jobs report will be out on Friday.
Thursday will bring the ECB meeting, and there we stick to our call for a 50bp hike although risks are tilted towards a smaller hike, particularly if tomorrow’s bank lending survey disappoints.
The 60 second overview
Euro area macro: The German economy just avoided technical recession with unchanged GDP in Q1 supported by lower energy prices and stronger export growth. Challenging times still lies ahead, though, as real income losses and rising interest rates continue to weigh on consumers. Inflation figures out of several euro area countries, including Germany and France, point to a slight uptick in euro area inflation tomorrow, with core inflation slightly lower. On balance, it is good news to ECB, that underlying price pressures are not surging further, however core inflation remains way too high.
Bank of Japan: Governor Ueda came out on the dovish side at the BoJ press conference on Friday, basically eliminating the risk of a quick pull-back from the yield curve control before a policy review, which could take up to 1½ years. JPY also weakened significantly on the back of the policy announcement and then again after the press conference.
Trade: The global trade bellwether, South Korea, saw a continued annual decline in exports of 14.2% in April, particularly driven by weak sales to China. Semiconductor exports were down 41.0%, indicating a continued global manufacturing struggle.
US: Real PCE consumption and Core PCE inflation came in slightly above expectations on Friday, and the Q1 Employment Cost Index was also slightly higher than expected. Wages increased 1.2% q/q, which is still clearly too fast. Core service prices eased to 0.3% m/m SA (from 0.43%), which was not a surprise after the CPI data released earlier. This did not change the outlook for the FOMC meeting Wednesday.
Equities: Global equities higher on Friday in relative quiet sessions. There were a lot of macro data, earnings results and yet another US bank on the brink of failing. Hence, one could easily find reasons for a volatile session but that did not happen. However, it does not come as a complete surprise to see First Republic in trouble and the same could be said about the outcome of the sum of data released on Friday. Investors are still light on risk and as data come in fairly good the pain trade is still up for equities. In US, Dow +0.8%, S&P 500 +0.8%, Nasdaq +0.7% and Russell 2000 +1.0%. Some Asian markets are closed this morning, but Japan is leading the open markets higher despite some disappointing PMI data from China this morning. Most of European markets are closed today. US futures are marginally higher.
FI: It is going to be an eventful week with the Federal Reserve meeting on Wednesday and ECB meeting on Thursday. We expect that the Federal Reserve will tighten monetary policy by 25bp and this will be the last hike during this cycle. ECB is expected to hike by 50bp, but it is going to be a fairly close call between 25bp and 50bp. ECB is expected to continue to tighten monetary policy as we expect that ECB will go to 4% for the policy rate.
FX: Friday’s session was dominated by JPY weakness following a soft Bank of Japan message. Also the NOK had a poor session following the fiscal FX transaction announcement from Norges Bank albeit a rise in oil limited the decline. EUR/USD continues to trade north of 1.10 while EUR/SEK has fallen back to the 11.30 mark.
Credit: The last trading day of the month was a relatively quiet one with iTraxx Main 1bp tighter at 83bp while iTraxx Xover was 6bp tighter at 435bp. First Republic Bank’s outstanding 4.374% bond maturing in 2046 declined markedly as the fate of the bank remains uncertain. To what extent it is possible to contain the problems of First Republic Bank is likely to be decisive for the overall market sentiment in the coming weeks.
