Markets
European stock markets faced broad-based selling pressure from the start today despite muted sessions on WS yesterday and Asia (excluding late Chinese swoon) overnight. We pick out the real estate sector which suffers both from yesterday’s US warning on commercial real estate and after Swedish commercial landlord SBB postponed a dividend and scrapped plans to sell shares after being junked by S&P this weekend on concerns over its liquidity position. Stalling/declining housing prices, rising interest rates and tighter lending standards and unfavorable redemption profiles weigh on the sector globally. Main European equity indices currently cede around 1%. This negative risk sentiment influences other markets in absence of relevant economic data. Hawkish ECB comments fail to inspire as well as more moderate governors outweighed the real hawks last week. Latvian ECB governor Kazaks repeated the mantra that quite some ground needs to covered and that further rate increases will be necessary to tame inflation. More specifically he doesn’t assume rate hikes to end in July and he definitely pushed back against premature rate cuts in the spring of next year. “Persistently high inflation is a bigger problem for society than a relatively short and shallow recession. Failing to contain inflation would be a failure because then the policy response in the second go would then need to be much tighter.” This pretty much sums our view as well. Current market pricing of a 3.6% policy rate peak with rate cuts early 2024 is way too conservative. ECB Kazimir linked last week’s slowdown from 50 bps rate hikes to 25 bps increments to the possibility to go higher for longer. ECB Nagel revealed himself as supporter of a bigger rate hike last week with ECB Vujcic and Lane talking more generally about ongoing inflationary pressures. German yield changes currently range between roughly -1 bp for the shorter tenors and +1 bp for the longer tenors. US yields add around 1.6 bps for the 2-yr and are broadly flat further down the curve. The dollar extends its momentum from yesterday with EUR/USD sliding from 1.10 to 1.0950. EUR/GBP copies the move lower, attacking the 0.8720 support zone and even the 0.87 big figure. The UK currency currently trades at its strongest level since December last year in the run-up to Thursday’s Bank of England policy meeting. UK gilts significantly underperformed today with yields 5.5 bps (30-yr) to 7 bps (2-yr) higher.
News & Views
The Australian government forecasts a budget surplus of A$ 4.2bn for the fiscal year ending in June. It would be the first surplus since 2008/2009. According to Treasurer Chalmers, the result is due to the government returning 82% of extra revenue windfall to the budget from lower unemployment, stronger jobs and wage growth and higher prices of key exports/commodities. However, the budget is expected to return to a A$ 13.9bn deficit in the FY 2023-24 (0.5% of GDP), rising further to A$ 35.1bn and A$ 36.6 bn over the following years. The deficit, amongst others, comes as the government takes measures to mitigate the impact of higher energy prices. The energy support is expected to ease inflation over the coming year by 0.75%. The government also sees a further structural rise in defense spending over the coming years while also spending on hospitals, health care and interest rate payments are expected to increase. The budget assumes growth to slow to 1.5% in 2023/24 before rebounding to 2.25% in 2024/25. This will result in a rise in an unemployment rate of 4.25% by mid-2024 and 4.5% mid-2025. Inflation is expected to slow from 6% this FY to 3.25% and 2.75% in FX 2023/24 and 2024/25 respectively. The Aussie dollar is losing modest ground today at AUD/USD 67.6, but his move occurred before the budget release.
Czech real industrial production (WDA) rose in March by 1.7% M/M and 2.2% Y/Y. The Y/Y increase in production was mostly influenced by manufacture of motor vehicles, increasing 42% Y/Y (10% M/M). A lower comparison basis and an improvement of supplies of components supported activity. Production in several other industries decreased Y/Y, with the highest negative contribution coming from electricity, gas, steam and air conditioning supply. A decrease also continued in manufacture of other non-metallic mineral products, chemical industry and mining and quarrying, in which production decreased by a fifth Y/Y. The value of new industrial orders declined 1.7% Y/Y. Construction activity decreased by 0.9% M/M (-6% Y/Y). The CNB last week upwardly revised its 2023 growth forecast from -0.3% (Feb) to 0.5%. The koruna today extended its post CNB rebound, trading near EUR/CZK 23.35.
