Sunset Market Commentary

Markets

There was a mild risk-off vibe at the European start this morning. Stocks slid 0.4% and core bond yields eased several bps in the US and Germany. But sentiment improved gradually and equities turned flat. Core bond yields bottomed and even show minimal daily gains in the US after the April retail sales. Considering the upward March revisions, the broadest (headline) gauge was more or less in line with expectations. Core measures including the control group (a solid 0.7% m/m) even topped analyst estimates. Seven out of 13 retail categories rose last month. US yields currently add 2.4-3.2 bps across the curve, helped higher by some Fed Mester quotes as well. The non-voting FOMC member said she needs more evidence that inflation is moving down, adding that data shows that rates are not sufficiently restrictive. The 2-y yield is seeking a return above 4%. German yields recouped 4 bps of losses. The dollar is going nowhere. EUR/USD trades unchanged near opening levels of around 1.088. DXY is fillings bids in the 102.4 area. A slew of Fed and ECB speeches due after wrapping up this report as well as the high-level debt ceiling talks may still influence trading later today.

The UK labour market report displayed strength in the first quarter by adding 182k jobs (160k expected) compared to the 2022Q4. The unemployment rate unexpectedly edged up, from 3.8% to a still historically low level of 3.9%. Wage growth accelerated slightly to 6.7% y/y in Q1. This news suggesting a very tight labour market was counterbalanced by the accompanying preliminary job growth estimate for April. The number of payrolled employees fell 136000. This figure is notorious for its often huge revisions but the fact that it was the first drop since February 2021 did not go unnoticed. It also added flavour to yesterday’s Bank of England Pill’s speech. The chief economist said he hoped last week’s 25 bps policy rate rise to 4.5% was the last one. Among the variables whether or not supporting his case for a pause is labour market tightness. UK money markets pared odds for a 5% terminal rate to 20% after the release. UK gilt yields lost up to 10 bps at the front end of the curve. Current changes vary between -2.2 (30-y) and 5 bps  (2-y). Sterling lost in a kneejerk reaction but clawed back later. EUR/GBP went from 0.868 at the open towards the 0.8721 resistance after the release and back to (sub) 0.87 at the time of writing.

The Kingdom of Belgium successfully auctioned a €4bn 20y (OLO99, maturing June 22, 2043) bond. Final terms were set at MS+54 bps compared to +55 bps area guidance. Books ran above €19bn. Today’s syndication – the third once this year – included, the debt agency has completed about 58% of its €45bn OLO funding need for this year.

News & Views

The Hungarian Statistical Office (KSH) reported a first estimate of Q1 GDP growth. Economic activity in the country was 0.9% y/y. According to KSH, the industry was the largest contributor to the decrease. The good performance of agriculture and of services moderated the decline. The main contributor to the growth in services was health activities, approximating the level before the coronavirus pandemic. Activity shrank 0.2% Q/Q, after a decline of 0.6% and 0.8% in Q4 2022 and Q3 2022 respectively. Even so, it was less than the -0.7% feared. The forint remains well bid. At EUR/HUF 369, the Hungarian currency trades near the strongest level since April last year. This gives the MNB a chance to start reducing the emergency 18% O/N depo rate, probably already at next week’s policy meeting.

Poland also reported better than expected Q1 growth. Activity rebounded 3.9% Q/Q after a 2.3% contraction in the 2022Q4. A regular first estimate with details on growth composition will only be published May 31. The National Bank of Poland also published April core CPI. Inflation less food and energy was reported at 1.2% M/M and 12.3% Y/Y (1.3% M/M and 12.3 % Y/Y in March). Underlying dynamics thus remain elevated. Other core measures eased slightly more (ex. administered prices 0.7% M/M and 14.0% Y/Y from 15.7%, ex. most volatile prices 0.8% M/M and 15.3% Y/Y from 16%). Earlier this month, headline CPI was reported at 0.7% M/M and 14.7% Y/Y. At its May 10 policy meeting the NBP kept a wait-and-see approach. However, Polish interest rate markets this week underperformed the region as the government announced additional 2024 fiscal/social spending in the run-up to the election expected in autumn. This might further fuel inflation and delay future NBP rate cuts. The zloty this week extended its impressive rally. EUR/PLN is extensively testing the February 2022 low (4.4826).