• Yesterday, markets continued last week’s repositioning, preparing for central banks to take bigger steps to counter to runaway inflation. Last week’s US data in particular illustrated activity and the labour markets stay resilient. For now there is no reason to already anticipate any slowdown in the pace of Fed tightening beyond the baked in 50 bps hikes for the June and July meetings. US yields for maturities longer than 5-year all returned (temporary?) north of 3.0%. European yields set new multi-year peak levels across the curve as investors are looking forward to Thursday’s ECB meeting. This morning, the Reserve Bank of Australia confirmed the trend in vogue, raising rates by a bigger than expected 0.50 bps to an 0.85%. Still with no key eco and sentiment turning risk-off, the rally in yields finally takes a breather. US yields are easing between 1.25 bps (2-y) and 4bps (10/30-y). EMU yields mostly how a more modest setback (German yields about minus 2bps across the curve) ). Even in a risk-off context, investors apparently don’t want to be wrong-foot as the new ECB inflation projections to be published alongside Friday’s policy statement might reinforce the case for more bold action. Recently, US and European equities held up fairly well despite the new up-leg in yields. However, today, amongst others, a big US retailer warning on profit margins as it tries reduce inventories amid weakening demand weighed on sentiment. US indices after the open are ceding between 0.6% (Dow/S&P) and 0.8% (Nasdaq). The EuroStoxx 50 drops about 1.1%. At $ 119 pb, brent oil is trading slightly off last week’s peak levels well north of 120 p/b. However, for now, there is no sign of a genuine trend reversal yet.
On FX markets, the dollar continues last weeks, admittedly gradual, comeback. The trade-weighted index (102.8) tries to regain the 102.74 short-term neckline. USD/JPY this morning touched the 133 barrier. However, softer US yields during the day slow the USD/JPY ascent (currently 132.75). A brief attempt of EUR/USD to regain the 1.07 barrier failed. The pair currently again trades in the 1.0655 area, nearing next support at 1.0627. The jury is still out, but a break below this level would suggest a loss of short-term momentum, which would be a bit surprising going into Thursday’s ECB meeting. Sterling is showing a mixed picture. After UK PM Johnson surviving a confidence vote within its own Conservative part, sterling this morning temporary declined to the GBP/USD 1.2431 area and EUR/GBP 0.8585 area. However, markets apparently concluded that politics probably won’t change the expected path for BOE policy in the short term. EUR/GBP and cable currently returned to 0.853 and 1.25area respectively.
• First Deputy Governor of the Riksbank Skingsley is leaving the Swedish central bank in August. Skingsley was widely seen as the frontrunner to replace Governor Ingves, who’s term ends at the end of this year. Her leaving opens the race to succeed Ingves at a time the central bank just made a huge U-turn on its very easy monetary policy and pressure is building to move faster with rate hikes than signaled back in April. The Swedish krone is trading a tad lower vs the euro today. EUR/SEK briefly ventured north of 10.50 before paring gains (SEK losses) to 10.48.
• The US trade deficit narrowed sharply in April, from -$107.7bn to -$87.1bn vs. -$89.5bn expected. A less negative balance came both on the back of rising exports (+3.5% m/m) as well as falling imports (-3.4% m/m). A record deficit in the first quarter this year chopped 3.23 ppts of GDP back then. The first reading of the second quarter suggests trade this time could in fact contribute to growth for the first time in two years.
• Hungary’s Government Debt Management Agency (AKK) raised the gross foreign currency bond issuance target by an equivalent of 2.5bn euro, bringing the total FX target for this year to 5.1bn euro. Of that amount, 4.5bn euro is remaining after February’s Samurai bond transaction. The AKK’s goal is to further extend average term-to-maturity and to diversify the investor base, it explained in a statement. The additional FX bond issuance won’t compromise the objective of having the FX debt ratio within the 10-25% benchmark range, AKK added, and the agency still plans to buy back some $2bn in FX debt that expires in 2023-2024. It has repurchased $50mln so far.