Markets
Markets on Friday were captured by a risk-off correction as headlines/rumours suggested an upcoming, direct strike of Iran against Israel. Especially US equities were hit, closing up to 1.62% lower (Nasdaq). For once, bonds also played their role as safe haven going into an uncertain weekend, reversing some short positioning that occurred after stickier than expected US March CPI data early last week. US yields declined between 4.9 bps (30-y) and 7.3 bps (5-y). The consumer confidence report from the University of Michigan painted a mixed picture with the headline sentiment index easing slightly from 79.4 to 77.9. At the same time, both the 1-year ahead (3.1% from 2.9%) and LT inflation expectations in the survey (3.0% from 2.8%) only confirmed the narrative of stubbornly high inflation expectations. Several Fed governors including Susan Collins, Mary Daly, Raphael Bostic and Jeffrey Schmid in one way or another reiterated that the Fed has every reason to stay cautious as long as activity remains strong while at the same time the Fed doesn’t get the additional confidence needed to comfortably start an easing cycle. Bunds outperformed Treasuries after the ECB on Thursday signaled it likely will start cutting rates in June. German yields declined between 11 bps (5-y) and 8.0 bps (30-y). The combination of an ever more obvious policy divergence between the Fed and the likes of the ECB, together with a risk-off sentiment catapulted the dollar. EUR/USD easily dropped below the 1.0695 YTD low to close at 1.0643. Cable slipped below the 1.25 barrier/range bottom (close 1.2452). USD/JPY set a new multi-year top (close 153.23).
Investors this morning try to assess the fall-out from the attack of Iran against Israel. Asian equities mostly trade in red (e.g. Nikkei -0.85%), but declines remain orderly. Markets apparently consider a scenario where any reaction from Israel won’t cause a major escalation. The oil price even eases slightly with Brent returning near $90 p/b. Bonds show little additional safe haven demand with US yields rising 2-3 bps. The dollar maintains most of Friday’s gains (EUR/USD 1.0655, DXY 105.96). The yen underperforms with USD/JPY breaking higher to currently trade near 153.8.
Later today, markets evidently will keep a close eye on the developments in the Middle East. This might lead to a more cautious sentiment on risk. However, it’s far from sure that a less positive sentiment will automatically translate into lower bond yields. Higher commodity prices and potential supply disruptions (shipping) don’t help the disinflationary process. Regarding the data, we look out for US retail sales and the Empire manufacturing survey. The latter is expected to improve from -20.9 to -5.0. Retail sales still are expected to grow a solid 0.4% M/M. Strong US activity/demand data only will reinforce the idea that there is no reason for the Fed to rush to rate cuts anytime soon. On FX markets, the dollar end last week succeeded a technically significant break. The EUR/USD decline below 1.0695 opens the way for the pair to return to the 2023 low at 1.0448.
News & Views
Fitch on Friday warned that recent fiscal slippage adds to uncertainty over Hungary’s ability to keep debt to GDP on a gradual downward path. Last year’s government deficit of 6.7% was well above the original target of 3.9% and October’s revised target of 5.2%. This year’s running deficit at HUF 2.3tn at the end of Q1 is already 58% of the 2024 annual target, largely due to higher spending. The 2024 goal post was already moved from 2.9% to 4.5%, a target Fitch considers challenging still given the weak growth prospects, high interest costs and social spending. The rating agency believes Hungary will be placed under the EU’s excessive debt procedure this year as a result. Fitch’s baseline scenario sees public debt rising to 73.9% this year before easing back to 72.5% in 2025.
China kept the rates on the seven-day reverse repo and one-year medium term lending facility unchanged this morning. The latter stands at 2.5% and serves as a guide to the commercial banks’ loan prime rates (LPRs). While the Chinese economy and inflation (a mere 0.1% y/y in March) could use some monetary support, the central bank is walking a tightrope, keeping one eye at the weak yuan as well. With the Fed unlikely to cut rates anytime soon, lowering rates in China would increase pressure on an already weak yuan. USD/CNY has been trending higher all year and Chinese authorities have recently given up defending the 7.20 figure. The pair is currently hovering north towards 7.24 in a gradual manner authorities seem to be comfortable with.
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