Another ECB speech carpet bomb is coming our way

Markets

Stock selling took a break yesterday. European equities posted gains of less than 1%. US markets slipped early in the open but rebounded later, ending the session with gains for the S&P (0.25%) and Nasdaq (0.98%). They found some comfort in a further decline in core bond yields.

Discussions between the Fed and the ECB remained hawkish but brought no new perspective. Fed members Waller, Bostic, Williams and Mester all backed 50 basis points for the next two (maybe three) meetings. Mester stood out by not ruling out a 75 bps “forever”. This helps explain the underperformance of the short end of the US curve despite a strong $45 billion 3-year bid. Yields rose 2 basis points on the 2-year but eased to 4.3 basis points on the 7-10 year sector.

German Bunds outperformed the US. The bullish curve flattened with variations ranging from -6.8 bps (2 years) to -9.5 bps (10 years). Peripheral spreads have tightened. Italy (-5bps) outperformed. The ECB’s Nagel and de Guindos indicated in a speech their preference for a takeoff of the rate hike in July but had limited impact. Markets are within a few basis points of full pricing in such a scenario.

Oil prices fell for a second straight day. Natural gas diverged as it erased earlier losses and gained 11% from intraday lows after Ukraine said Russian gas flows into one of two key entry points that serve as a transit to the Europe would stop from today.

The dollar in the currency markets reversed initial weakness into marginal strength. EUR/USD retreated to 1.053, USD/JPY held above 130. British Prime Minister Johnson has said he is ready to tear up the NI protocol following the Northern Irish election last week, claiming he was undermine the Good Friday Agreement. This puts the UK back on a collision course with the EU. For now, the pound is paying little attention to the issue, but it is worth watching. EUR/GBP maintained a narrow sideways trading range around 0.855.

China reporting a drop in Covid cases sent its stock markets jumping 2-3% this morning, outperforming in a mixed Asian trading session. This helps the yuan strengthen a bit for the first time in five days despite a mixed CPI reading. The USD is generally trading lower. Core bonds are swinging sideways.

US CPI in April should have slowed to 8.1% from 8.5% (6% from 6.5% in core). Much of this is statistical base effects at work. The key question at the current junction, however, is how strong the monthly momentum is. Ultimately, this will determine how quickly annual inflation returns to its target. We expect monthly (basic) numbers to remain high for some time yet.

In Europe, another carpet bomb of ECB speeches comes to us. Our attention is particularly focused on Lagarde of the ECB. Will she side with Nagel, Wunsch and Guindos? This would mark a dramatic turnaround, which the euro and bond yields would surely notice. If it continues to move forward, EUR/USD could break the 1.05 barrier today.

News headlines

Price inflation in Hungary accelerated at a faster than expected pace in April, jumping from 1.6% M/M to 9.5% Y/Y (was 1.0% and 8.5% in March). Core inflation data as published by the central bank also rose from 9.1% to 10.3%, reaching the highest level since 2001. The monthly price increases were widespread in different sub-categories with food (3.6%), clothing (2.8%), housing (0.9% ), furniture (1.7%) and transport (0.9%). draw attention. Thus, inflation is moving further away from the MNB’s 3.0% target. The data keeps the pressure on the MNB to continue monetary tightening. The 2-year swap rate rose yesterday by 7 bps to 8.50%. The forint traded slightly stronger in the EUR/HUF 380 zone, but this was mainly due to better risk sentiment.

April price data from China this morning showed a mixed picture. Headline CPI rose from 1.5% year-on-year to 2.1%. Comments from the Bureau of Statistics attributed the increase to virus outbreaks and rising global commodity prices. Rising energy and food costs were the main drivers of this increase. Core inflation excluding food and energy fell to 0.9% from 1.1%suggesting price pressures less related to demand. The PPI in April even slowed from 8.3% Y/Y to 8.0% Y/Y. The BNS attributed the decline to government measures to stabilize commodity prices and improve supply. Today’s data does not prevent the Chinese authorities from focusing their efforts on (selective) measures to support growth. After a substantial weakening over the previous weeks, the yuan is now appreciating slightly (USD/CNY 6.722).

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