Markets
Question today was whether markets would build on yesterday’s post-BoC repositioning. Team Tiff Macklem concluded they had no other option but to restart the tightening cycle. The demand/supply balance remained too stretched. It simply wasn’t justifiable anymore to reasonably hope that the 4.5% policy rate in place since January would be restrictive enough to bring inflation back to 2% in a sustainable manner. A similar analysis applies to multiple developed economies, reinforcing the case for a widespread ‘higher for longer’ scenario. At the start in Europe, EMU yields tentatively tried some follow-through action on yesterday’s rise, but the move immediately stalled. There was too little ‘news’. The revision of EMU Q1 GDP growth (-0.1% from 0.1%) officially put the EMU economy in a (mild) recession at the turn of the year (-0.1% in Q4 2022 as well). This doesn’t change the picture going forward, but also didn’t help. German yields gradually nearing key resistance at 2.96/3% (2-y) and 2.55% (10-y) probably also put a lid on a further rise (for now). US jobless claims jumped sharply from 233k to 261k. Continuing claims declined further (157k from 1794k). It evidently won’t change the Fed’s assessment at next week’s policy meeting. Still, US yields after the release dropped in the negative territory (except for the very long end). The 2-y yield eases 4 bps. The 30-y trades more or less unchanged. German yields shed less than 2 bps across the curve. Equities (both in the Europe and in the US) are keeping up well (Eurostoxx 50 +0.15%, S&P opens little changed). In this respect, we keep an eye at real yields. For now, the recent rise doesn’t hurt sentiment too much. Still, the US (10-y) real yield is on the verge of breaking out of a consolidation/bull flag pattern (cf graph infra).
On FX markets, the dollar gives tentative signs of a topping off pattern, but first relevant technical support hasn’t been broken yet. DXY dropped to 103.65 (ST neckline at 103.38). EUR/USD rebounds to 1.0745, but last week’s ‘minor’ top (1.0779) survives. EUR/GBP held a tight range near 0.86. The Swiss franc this afternoon jumped sharply from EUR/CHF 0.976 to fill bids just below the 0.7 big figure. SNB’s Jordan warned on second and third round effects. As Swiss yields are relatively low, Jordan advocated that it’s not a good idea to wait with raising rates. An additional hike at the June 22 SNB meeting can be taken for granted.
News & Views
The IMF concluded its regular country review of Norway, releasing the statement of this year’s so-called Article lV mission. Output grew strongly in 2022 and it is projected to expand this year, albeit at a slower pace. While high inflation and interest rates weigh on activity, the labor market has been resilient, and Norway has enjoyed very favorable terms of trade. Risks to growth remain balanced, but there are upside risks to inflation. The IMF added that supervisory authorities should remain vigilant to potential pressures in the real estate markets and global turbulence. Fiscal policy should be more supportive of the Norges Bank’s disinflationary efforts. Last month, the government did the opposite by announcing plans to raise spending of its sovereign wealth fund, widening the structural non-oil deficit for 2023 from NOK 317bn to NOK 373bn. Monetary policy has been responding in a timely manner, but to bring inflation durably towards the medium-term target of 2%, further tightening is needed.
Hungarian inflation decreased by 0.4% M/M in April (vs +0.5% expected) with the Y/Y figure dropping more than forecast, from 24% to 21.5%. Prices were mainly dragged lower by electricity, gas and other fuels (-3% M/M; 37.2% Y/Y). Food prices rose by 0.1% M/M (33.5% Y/Y) while services became 0.9% more expensive in April (14.3% Y/Y). Earlier this month, Hungarian Q1 GDP growth was downwardly revised to -0.3% Q/Q. Both April retail sales (-12.6% Y/Y) and industrial production (-2.5% M/M & -5.8% Y/Y) also fell more sharply than anticipated. The recessionary environment and accelerating disinflationary tendencies allow the Hungarian central bank to continue efforts to reduce emergency deposit rate towards the 13% base rate. The forint stomachs the data well, holding near strongest levels against the euro since April of last year (EUR/HUF 368).
