• Global markets entered calmer waters after yesterday’s wild risk-off. Even so, after losses of 3.0-4.0%, equities rebounding 2.0%/1.5% (EuroStoxx50/Nasdaq) isn’t enough to conclude that the repositioning has run its course. Eco data provided only secondary help for investors to make up their mind on how the triangular relationship between too high inflation, decelerating growth and CB tightening will turn out. Economic expectations as measured by the German ZEW survey remained deeply negative but improved modestly from -41.0 to -34.3, while a further decline was expected. The current situation index declined further to -36.5 from -30.8. ZEW indicated that lockdowns in China caused a strong decline in current assessment. Interestingly, the ZEW indicator for the EMU improved more significantly from -43.0 to -29.5. Also remarkable, both for Germany and for the EMU experts expect a substantial cooling of inflation (-10.5 from 26.8 and -10.6 from 25.9) as they see interest rates hikes in the next six months. In the US, NFIB small business confidence (93.2) stabilized at the weakest level post corona. Entrepreneurs still see inflation and quality of labour as their biggest headwinds. In a speech, NY Fed President Williams defended the Fed frontloaded approach that should lead to a soft landing route by bringing demand back in line with supply. As the Fed normalizes interest rates ‘expeditiously’, he expects PCE inflation to return to 2.5% next year and to the Fed’s 2.0% goal in 2024. Inspired by a better risk sentiment, US yields initially tried to regain some upward momentum, but the attemp never gained traction. The (corrective?) short squeeze resumed. US yields face another downleg with the belly of the curve (5/10-y minus 6 bps) outperforming the wings (2-y -1.5 bps; 30-y -4 bps). EMU/German bonds even outperform their US counterparts declining between 7.5 bps (2-y) and 8.8 bps (5-10-y). Evidently, there is no direct link with the ZEW assessment, but also this decline is driven by a further easing of inflation expectations. The 10-y EMU inflation swap trades at 2.76%, down from a peak of 3.14% 10 days ago. The combination of a risk rebound, lower nominal yields and easing inflation expectations is a more comfortable context for EMU peripheral bonds. After a protracted widening recently, 10-y spreads versus Germany are easing with Italy outperforming (minus 9 bps), bringing the 10-y yield back below the 3.0% handle (2.97%).
• Very little to report on the major FX cross rates. DXY (103.60) hovers sideways off recent 104+ peak levels. EUR/USD (1.056) also trades near the middle of a sideways intraday range. Similar story for EUR/GBP (0.8560). USD/JPY is holding yesterday’s decline but fails to sustainably break below 130, despite the decline in core yields.
• Norwegian inflation accelerated unexpectedly in April by 1.2% m/m to 5.4% y/y (from 4.5% in March vs 4.7% expected). It’s the highest level since 2008. Underlying core inflation rose more than forecast as well, by 0.9% m/m to 2.6% y/y (from 2.1% vs 2.4% expected). Details showed broad-based price increases with only alcoholic beverages and tobacco down on a monthly basis (-0.1% m/m). Housing & utilities (2%), clothing and footwear (1.8%), transport (1.3%) and recreation & culture (1.2%) showed the biggest increases. The Norges Bank last week indicated concern with the risk of accelerating price and wage inflation and readiness to raise the policy rate more quickly than indicated in the March policy rate (quarterly hikes towards a 2.5% top end 2023). Markets already discount such faster scenario, reaching the 2.5% mark early 2023 and a policy rate peak around 3.25% end 2023. The NOK stabilizes near EUR/NOK 1.1025 following a string of losses which deteriorated the NOK-technical picture (see graph).
• Czech inflation reached its highest level since the independence of the Czech Republic, rising by 1.8% m/m in April to 14.2% y/y. Prices of goods in total went up by 1.9% m/m and prices of services by 1.6% m/m. The hot CPI-print comes in the immediate aftermath of last week’s CNB policy meeting and again fades the CNB’s ‘fresh’ inflation forecasts (13.8% y/y expected). It suggests that the policy rate cycle could reach beyond the often rumoured final finetuning. Czech money markets discount a 6.75% policy rate peak this year compared with the current 5.75% level. The Czech koruna trades a tad stronger today, just below EUR/CZK 25.