• The new week starts the way it ended last Friday: with a new bond sell-off. The trend of higher yields is definitely not new but received new impetus from the Fed and ECB Meeting minutes last week. Both highlighted the fact that monetary hawks are either firmly behind (Fed) or are in the process of taking over the steering wheel (ECB). The fact that the economic calendar is semi-backloaded with US CPI due tomorrow and the ECB meeting on Thursday did not keep markets sidelined as they usually do. Quite the opposite actually: it seems that bond markets are frontrunning. They do have a point though, especially with respect to the ECB. We wouldn’t be surprised if the outcome of the April meeting showed a further shift to the hawkish side of the spectrum. Core bonds slide with German Bunds underperforming US Treasuries. Yields rise 8.3 bps (2y) to 10 bps (30y), steepening the curve with moves mainly driven by real rates. The 10y yield (+9.8bps) is attacking the 2018 high of 0.80%. A break higher paves the way towards the 2015 resistance area around 1%. European swap yields add 5.3-8.3 bps. The 2y is testing the 2013 resistance of 0.78% with euro area money markets raising their ECB bets by the day. They currently discount two 25 bps hikes and counting by October. The US curve bear steepens too in an offshoot of the rapid quantitative tightening pace (targeting the longer end) as suggested by last week’s Minutes ($95bn per month). Changes range from 3.1 bps (2y) to 6.3 bps (30y). The 10y reference finds itself in the resistance zone of 2.76%-2.80%.
• The Japanese yen on FX markets catches the eye. Minor risk-off is not even close of an enough support against the surge in core bond yields. EUR/JPY convincingly surpasses 136 and is on track for the highest close since early 2018. USD/JPY crushes the 125 handle it tested end of March (125.48) to trade at the highest level since mid-2015. The Norwegian krone is second to last in the G10 club (see below). The euro opened strong this morning. It enjoyed a minor relief/stop-loss rally after Macron held the upper hand over Le Pen in Sunday’s first round of the presidential elections. They will face each other in the second round on April 24 in a repeat of the 2017 elections. The race to the Elysée however is much tighter than it was back then. The common currency in the meantime pared some of those early gains, especially against the USD. EUR/USD trades flat at 1.088 after having touched an intraday high of 1.095. EUR/GBP was a copy paste; gapping higher above 0.84 at the open only to give up on all gains. Sterling itself is relatively well bid too, despite disappointing industrial production figures this morning.
• Of late most inflation releases surprised to the upside. Norwegian March inflation was the exception to the rule. Both headline and core inflation printed softer than expected. Headline inflation rose 0.6% m/m to be up 4.5% y/y. Core inflation rose a modest 0.3% m/m, leaving the y/y figure unchanged at 2.1%. The Norges Bank started a gradual rate hike cycle in December. In its March policy report, the NB indicated to hike quarterly with a next step at the June meeting. It forecasted the policy rate to reach 2.5% at the end of next year. Broader inflationary pressures, however, raised questions whether the NB also should consider faster policy normalisation. Today’s soft core inflation serves as a counterargument. The Norwegian krone, which recently profited from a higher oil price and expectations of higher interest rate support, corrects modestly. EUR/NOK rebounded from the 9.48 area just before the CPI release to 9.5475 currently.
• At the other end of the inflation spectrum, Czech CPI again accelerated to a pace faster than expected. Prices rose 1.7% M/M to be up 12.7% Y/Y. Costs of transportation rose 7.1% M/M, domestic fuels rose 21.7%. Costs related to housing, which has a weight of 26.7% in the basket, had risen 17.6% Y/Y. The CNB raised its policy rate 50 bps to 5.0% at the end March meeting. With risks for inflation to rise even somewhat further in the coming months, another bold rate hike at the next meeting (May 5) is likely. The Czech krona gained modestly today with EUR/CZK trading at 24.42.