Markets
Today, the intraday moves in (core) bonds were more modest compared to the previous days. The topics that caused investor nervousness of late aren’t solved. The Trump administration investigating the need of import tariffs on automobile imports might even become an additional source of uncertainty. However, at least today, there was little in the way of additional negative news e.g. from Italy. European equities and US equity futures tried a cautious rebound this morning, but the move could not be sustained. Bunds and Treasuries lost temporarily a few ticks but the downside was well protected. In the Minutes of the April policy meeting, the ECB admitted that uncertainty on the outlook had increased. However, the bank basically maintained a positive assessment on the economy. US yields decline between 1 bp and 2 bps. So, the 10-year yields is drifting a bit further below the 3.0% mark. German yields also decline marginally with long end outperforming (-2.2 bps for 30-y). So, there is clearly no upside reversal (in yields) after recent substantial decline. The bund contract and the 10-y yield stay near key resistance/support levels. EMU peripheral bond markets entered calmer waters. The 10-y Italian spread versus Germany ‘narrowed’ 1 bp. Spain (-5 bps), Portugal (-5 bps) and Greece (-14 bps) outperformed.
The dollar traded with a slightly negative bias today. USD/JPY stayed under pressure this morning (Japanese markets reacted in a negative way to the threat of US import tariffs on autos). USD/JPY finally settled in the mid 109 area. EUR/USD tried a cautious intraday rebound after an extensive test of the 1.1700 support area. However, the move has no strong legs. EUR/USD currently trades in the 1.1735 area. So, the recent lows are still within reach and the sources of recent euro softness are still pending.
After a series of disappointing data, the April UK retail sales finally brought a positive surprise. Sales excluding auto fuel rose 1.3% M/M (after a 0.5% decline in March). The consensus expected a more modest rise of 0.5% M/M. The reaction on the UK interest market and of sterling was modest. EUR/GBP drifted north going into the publication of the report, but this move was mainly due an overall intraday rebound of the euro, rather than sterling weakness. After the retail sales EUR/GBP reversed the earlier rebound. The pair dropped to the 0.8740/50 area. In a broader perspective, this retail sales report obviously isn’t a strong enough trigger for markets already to raise the probability of an August rate hike. This is a fortiori the case after yesterday’s soft April CPI data. More good news, both on economic activity and on prices, is needed for sterling to receive any meaningful interest rate support. For now EUR/GBP remains blocked in the 0.87 area. Cable regained the 1.34 barrier, but this move at least partially mirrors a less strong USD momentum.
News Headlines
At the IIF conference, the ECB’s chief economist Peter Praet reiterated economic conditions are good, but some “clouds” are on the horizon. He referred to political uncertainty in places like Italy that could fundamentally undermine business confidence.
The Turkish lira resumed its slide after it rallied back dramatically due to an emergency rate hike of 300 bps. Markets are questioning whether the move is sufficient to stabilize the currency, which already lost 15% since April.
In an interview, Fed’s Kaplan said “we should be raising rates until we get to neutral”, adding he’s not yet prepared to say he want to go above neutral. In Kaplan’s view, interest rates need to be raised four more times before reaching the equilibrium level.
