Markets
The ECB laid the groundwork for a June rate cut yesterday and that was basically all there was to say about it. Lagarde revealed some wanted to cut rates already and reports afterwards wrote about a handful of officials that needed extra convincing to rally behind the decision to stand pat for a little while longer. European yields erased a kneejerk move lower with markets expecting a June move for some time now. Changes in the swap curve ranged between +1.1 and 4.8 bps with a higher open accounting for most of the gains. US Treasury yields from the 5y tenor on wiped out earlier losses and moved to fresh YtD highs, adding 2.7-5.7 bps. A mediocre $22bn 30y auction with a slight tail and weaker bidding metrics had little market impact. The front end hovered sideways near the recent highs. The 2y could resist an intraday test of the 5% level after another solid reading of weekly jobless claims though. The US dollar maintained the upper hand against an overall weak euro. EUR/USD dropped to 1.0699 before paring losses to 1.0726. USD/JPY eked out another 34y-high of 153.27. Sterling licked its wounds after Wednesday’s sell-off against USD. GBP/USD fights to keep the 1.25 support zone alive. EUR/GBP slipped though, with all of the steady April “gains” now wiped out. BoE policymaker Greene hit the wires often these past few days. She voted to keep rates steady in recent meetings and her comments suggest she’ll continue to do so for some time to come. Greene said she is still far off backing rate reductions with wage growth and the risk of inflation persistence still too high. She sided with her hawkish colleagues Haskel and Mann in that markets have been too optimistic in their rates pricing. UK money markets have adjusted their thinking in recent days to just 50 bps of cuts this year though.
We’ll get some more views of central bankers today and they could spark some intraday movement. Speeches by Schmid (Kansas City) and Bostic (Atlanta) are worth the attention after the recent string of stellar US data. Collins (Boston) performs as well but gave some flavour yesterday already. She noted current policy may be less restrictive than expected and less easing this year than thought earlier may be warranted. Collins is part of the neutral camp and its interesting to see this side adopts a more hawkish view. The first ECB speakers after the meeting just came in as well, with Kazaks typically pioneering. He just stated that barring surprises there will be a cut in June and said that if inflation continues to fall, the ECB can continue doing so. Turning to markets, we’ll look for a technically significant weekly close in US yields above the recently conquered resistance levels (eg. 4.54% in the 10y). Some more hawkish Fed speeches could prompt another test of the 5% by the 2y but a clean break ahead of the weekend is unlikely. The dollar holds the better cards against both the euro and the pound. EUR/USD is nearing the 1.07 pivot again and GBP/USD holds close to 1.25 this morning. Which will break first?
News & Views
The Bank of Korea held its policy rate stable at 3.5% for a 10th consecutive time. Economic growth is forecast to prolong its improving trend and (core) inflation to continue its slowing trend. The latter still remains high though and there are high uncertainties regarding monetary policies in major countries, FX volatility, and geopolitics. It is premature to be confident that inflation will converge to target given this high degree of uncertainty. The Board will maintain a restrictive monetary policy stance for a “sufficient” period of time until such confidence is established. The previous statement referred to a “sufficiently long” period. BoK governor Rhee ruled out a policy rate cut in H1 2024 but added that all entire board members believe that such move can’t be ruled out in H2 2024 in the case that CPI slows to 2.3% at the end of this year as forecast. KRW weakness this morning adds to USD strength earlier this week. USD/KRW surged from levels around 1350 on Wednesday to 1375 currently, the highest since November 2022.
Gas prices spiked by 7.5% yesterday after Russian attacks on two Ukrainian underground gas storage facilities. Russia targeted similar facilities in earlier strikes. Although still operating, it highlights potential risks for storing gas should Europe’s stockpiles become full. Ukraine has more storage capacity than any other European nation. The benchmark European gas future (Dutch TTF) rose to €30/MWh, matching the highest level since early February.
