Markets
The ECB bank lending survey and the EMU April flash CPI were final key input for the ECB Monetary Policy Committee to start deliberations for Thursday’s interest rate decision. In the quarterly Bank Lending Survey EMU banks reported a further substantial net tightening on credit standards especially for loans to firms and for house purchases. Tightening was more than banks anticipated earlier this year. The tightening was partially due to higher perception of risk but mainly also the result of ECB policy as banks adapted credit/credit pricing to higher funding costs due to ECB rate hikes and a decrease in central bank liquidity. At the same time, demand for credit (especially housing loans) also declined sharply. Banks also indicated deteriorating funding conditions. The March financial turmoil played a role, but ECB policy was also important as a decline in excess liquidity (TLTRO repayments and lower APP reinvestment) was said to have a negative impact in market financing conditions, liquidity positions and total assets. In the wake of national CPI April CPI data published last week, the EMU April flash CPI brought no high profile surprise. Headline inflation printed at 0.7% M/M raising the Y/Y measures from 6.9% to 7.0% . Core inflation ‘eased’ marginally from 5.7% Y/Y to 5.6%, as expected. However the M/M headline figure shows that the inflation dynamics remains strong. A near record core inflation also can’t be really comfortable for the ECB (services costs accelerated further to 1.2% M/M and 5.2% Y/Y from 5.1%). Even so, markets post the release hardly changed their assessment on the chances between a 25 or 50 bps rate hike on Thursday (only about 15% probability discounted for 50 bps step). German yields are rising between 7 bps (2-y) and 4.5 bps (30-y) but most of these gains were mainly a catch up move with yesterday’s rise in the US and already on the screens before the EMU data releases. US yields are easing marginally (2-y minus 1 bp; 5-y minus 2.75 bps) as yields take a breather after yesterday’s jump higher. The March JOLTS jobs openings to be released after finishing this report still has market moving potential. US markets currently see hardly any chance for the Fed to resume its hiking cycle after taking a pause after tomorrow’s 25 bps point step. The RBA decision this morning shows the scenario still can turn out different when a CB stops its ani-inflation fight too early. The upside in both in European (Eurostoxx 50 -0.65%) and in US (S&P -0.4%) equities apparently is blocked with key resistance nearby (respectively at 4415 and 4200).
In FX markets, the dollar currently has the benefit of the doubt, but gains are far from impressive. DXY (102.2) broke out of ST downward sloping trend channel, but more is needed to call a it a real reversal. EUR/USD intraday touched the 1.0950 area, but one weaker than expected US data release might already be enough to change fortunes again. Sterling also joined the broader wait-and-see attitude with EUR/GBP holding a tight range close too, mostly slightly below the 0.88 barrier.
News & Views
Turkey’s central bank asked commercial banks to limit dollar sales to companies that don’t have urgent payments, people familiar with the matter said. Instead they are asked to prioritize dollar demand arising from maturing accounts under the KKM program. This government-backed scheme is designed to prop up the lira by compensating holders for Turkey currency losses against foreign currencies including the USD. According to the people, unusually high demand may arise today with a lot of those accounts reaching maturity. The total amount invested as per April 20 stands at $100bn. KKM is the government’s preferred (but costly) tool to prevent excessive lira losses. USD/TRY hits record highs (TRY-lows) every day but daily net gains are relatively small. Since March though the TRY-depreciation process sped up.
Swedish house prices extended a drawn-out decline in April dropping 1% m/m, data from the country’s state-lender showed. The fourteenth month of declines comes as the Swedish Riksbank still jacks up policy rates to fight well above-target inflation. With Swedish mortgages typically fixed for only a limited period (most of them for three months), the Riksbank’s tightening course filters through fairly quickly into mortgage rates and the housing market. The Swedish krone is trading relatively calm today with EUR/SEK hovering around 10.30.
