Dollar correction continued but moderate

Markets

Stock markets ended last week with a bang. Europe gained 1.83% while gains on Wall Street reached 3.33% (Nasdaq) after an already solid performance on Thursday. The S&P500 (+2.47%) moved closer to an initial resistance of 4195 (38.2% recovery of the 2022 decline). A slew of US economic data, including a drop in PCE inflation and the biggest rise in inflation-adjusted consumer spending (see below) investors satisfied with the hope that the Fed may not need to act as aggressively as feared.

This explains why core bonds didn’t really suffer from the risk mood. US Treasuries, however, underperformed German Bunds. The variations ranged from -1.8 bp (30 years) to +1.1 bp (3 years). The 10-year rate (-1 bp) balanced on the support zone of 2.71%. German rates fell 0.3 bp (2 years) to 3.5 bp (30 years).

While oil (Brent closed near $120/bbl) had a strong run, commodity-linked currencies were Friday’s best performers. The AUD, NZD and NOK gained between 0.5 and 1% against their major peers. Dollar correction continued but moderate the trade-weighted index dipping a few ticks to 101.67. EUR/USD tested the intermediate resistance of 1.0758 before finally closing at 1.0735. USD/JPY stabilized around its 50-day moving average at the 126 high zone. EUR/GBP calmed down after some wild swings due to the PMI earlier in the week. The currency pair tipped around the big figure of 0.85.

Asia-Pacific sentiment this morning is as buoyant as it was in the US last Friday, helped higher by China easing some of the virus restrictions in Shanghai and Beijing. Japan and Hong Kong are outperforming. Chinese stock markets are rising modestly but the yuan is having an excellent run. USD/CNY drops from 6.70 to 6.65 with USD still trading lower as well. EUR/USD tries again at 1.0758. Bond futures are trading lower.

U.S. cash markets are closed on Memorial Day and keep the focus on Europe for today accordingly. The EC’s Economic Confidence Indicator draws attention to the ecological calendar, the start of a special two-day meeting in Brussels where EU leaders will discuss defence, inflation, Energy and Food Security and May Inflation in Spain and Germany. The European figure is expected tomorrow. An early regional reading in the North Rine Westphalia this morning suggests an upside surprise. Such a scenario could reignite speculation of an ECB rate hike of 50 basis points, as proposed by firms like Knot and Holzmann, and protect European yields on the downside. For EUR/USD, the next benchmark is 1.0806, but this would require confirmation under full liquidity circumstances.

News headlines

CNB member Holub on Sunday called a 75 basis point hike at the June 22 policy meeting more or less realistically expected by money markets. It’s the last meeting before new governor-appointed Michl becomes chief of the central bank. Holub believes that inflation will have to be controlled by cooling demand, which implies both fiscal and monetary policy tightening. Friday, Governor Nidetzky hinted that a rate hike in June could be enough to bring inflation back to the 2% target by the end of next year, but gave no indication of how extensive the hike would be. Earlier last week, Michl reiterated his view that rate hikes are only appropriate in the face of demand-driven inflation. As he believes that inflation is currently mainly cost-driven, he reiterated his view that rates can be held steady after taking over as CNB chairman in July. However, he left the door open for the board to react accordingly in the event of future domestic price inflation. The Czech currency found a new short-term balance at the end of last week in the EUR/CZK 24.70 zone.

US economic data released on Friday painted a rather comforting picture of the economy at the start of the second quarter. Personal income rose slightly less than expected at 0.4% M/M. However spending remained healthy at 0.9% M/Mfollowing an upward revision of the March figure from 1.1% to 1.4%. Actual spending adjusted for price increases also rose a solid 0.7% M/M. The data suggests that American consumers are still ready to use their savings to keep spending. One of the Fed’s favorite inflation measures, the The PCE deflator remained high, but eased to 0.2% M/M and 6.3% Y/Y, compared to 0.9% M/M and 6.6% Y/Y in March. A sharp drop in the U.S. trade deficit in April from $125.9 billion to $105.9 billion, due to both lower imports and higher exports, for the second quarter could remove a major contributor negative to negative growth of -1.5% in the first quarter.

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