Markets
Developments in the Middle East gradually lost their grip on global markets with central bank talk again taking the lead. Fed Vice-Chair Jefferson delivered a perfect assist for Chair Powell to acknowledge the consequences of recent strong US activity data while inflation remains stubbornly high. Jefferson warned that the Fed will have to keep rates higher for longer if inflation persists. Expressing his belief for inflation to come down given a steady policy rate didn’t prevent further bond selling. Later, Powell couldn’t but fully accept consequences of the Fed’s data dependent approach. In a panel discussion he admitted that recent data didn’t provide the greater confidence the Fed needs to start policy erasing. “Given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us”. Market expectations for a first Fed rate cut are pushed back beyond summer (90% for September) and investors only see about 50% chance that a second cut will follow this year. US bond yields added between 4.6 bps (30-y) and 8.2 bps (5-y). The 2-y yield again tested the 5% barrier and longer maturities all touched new YTD highs. German yields added between 2.4 bps (2-y) and 4.6 bps (10-y). ECB speakers including President Lagarde and Villeroy confirmed last week’s guidance that the ECB intends to start cutting rates in June. They admit that the inflation path will be more bumpy later this year. The impact of geopolitical tensions (oil) and the valuation of the euro are on the radar. The amount of additional cuts in H2 is uncertain. (US) equities held relatively stable despite the Fed’s higher for longer message (S&P 500 -0.21%). The dollar rally shifted into a lower gear, but the US currency clearly holds pole position. EUR/USD eased slightly further (close 1.0919). The yen continues outperforming despite multiple verbal warnings from Japanese officials (USD/JPY close 154.72).
Asian equity markets show a mixed picture, suggesting some stabilization after recent declines. The yuan remains in the defensive against a strong dollar with USD/CNY touching a minor YTD top near 7.24. Central bank speakers include ECB’s de Cos and Schnabel, Fed’s Mester and BoE governor Bailey. US yield markets might look for a short-term equilibrium after their repositioning. In Europe, we keep the 10-y swap yield on the radar as it is testing the YTD peak levels from end February. For now, we see no reason to fight the USD-accent, with the EUR/USD 1.06 big figure within reach.UK March inflation printed higher than expected (headline 0.6% M/M and 3.2% Y/Y vs 0.4% and 3.1% expected). Core inflation slowed less than expected to 4.2% Y/Y as did services inflation. The data make an early BoE rate cut unlikely. Sterling rallies to EUR/GBP 0.8533 after the release.
News & Views
New Zealand inflation printed line with expectations. First quarter price growth amounted to 0.6% q/q, a slight acceleration from the 0.5% in 2023Q4. The yearly gauge slowed from 4.7% to 4%, the weakest in three years. Trimmed-mean measures ranged between 0.7% and 0.8% q/q and 4.4-4.6% y/y. Non-tradeable CPI, a proxy for domestic inflation, picked up from 1.1% q/q to 1.6%. The yearly indicator barely slowed to 5.8, which is more than the central bank expected (5.3%). At the meeting last week, the RBNZ indicated unchanged policy rates until 2025, citing sticky core inflation. There’s nothing in today’s CPI numbers to change the RBNZ’s thinking. Markets expect an inaugural cut at the final policy meeting this year (November) but conviction has dropped. The kiwi dollar appreciates this morning after a few rough days against the US dollar. NZD/USD rises from 0.588 to 0.59.
South Korea’s finance ministry issued a statement after its minister discussed the recent weakening of their respective currencies with his Japanese counterpart. Choi (SK) and Suzuki (JN) expressed “serious concerns” and warned of taking appropriate steps to counter any drastic volatility. SK central bank governor Rhee shortly after labelled the recent SK won moves as a little excessive, noting that yuan and yen weakness are affecting the currency as well. It’s testament to many emerging market currencies coming under selling pressure after central banks having either cut rates or hinting to do in the near future against the background of a Fed keeping rates high for longer. USD/KRW pared some of recent gains after the statement, trading at around 1386 compared to almost 1400 yesterday. Both Choi and Suzuki will meet their US counterpart Yellen in the US today.
. The yen continues outperforming despite multiple verbal warnings from Japanese officials (USD/JPY close 154.72).){kind=link}