• With some good will, one could label this morning’s decline on Asian equity markets (mostly 1-2%) as ‘relatively modest’ given the WS sell-off. However, European trading soon made clear that this was no harbinger of dip-buyers stepping in. No buy-on-dips, even no sell-on-upticks, but simply further (stoploss) liquidation of cyclical, growth sensitive assets. European equities are losing about 2% (EuroStoxx50). US indices again decline between 0.5/1.5%. Even as the sell-off is caused by market fears that aggressive CB tightening risks undermining already weakening growth, core US and German government bond perfectly play their safe haven role. US yields are easing 8/6 bpn (2/30-y) to 9 bps (5 & 10-y). Eco data aren’t the main driver for markets currently. Still, an unexpected decline in the Philly Fed Business outlook (2.6 from 17.6) didn’t help to dismiss growth worries, even as orders and shipments in the survey remain at solid levels. US weekly jobless claims rose to a higher than expected 218K. The German yield curve bull flattens with yields tumbling between 4 bps (2-y) and 10 bps (10 & 30-y). The decline in EMU swap yields, especially at the short end of the curve, is less outspoken (-6 bp for 10-y, but only -1 bp for the 2-year). Investors clearly understand that the ECB being behind the curve is part of the problem rather than a solution to current economic complex. The accounts of the ECB April policy meeting showed quite a degree of discord on interpreting the rise in inflation and in some measures of inflation expectations. In this respect the accounts said that ‘Some members viewed it as important to act without undue delay in order to demonstrate the Governing Council’s determination to achieve price stability in the medium term. Such action was deemed necessary to prevent the temporary bout of higher inflation from becoming entrenched and to prevent inflation expectations from rising further from the Governing Council’s target’. However, a majority held to the approach of gradualism, flexibility and optionality. The June staff (inflation) forecasts are seen as a good anchor to reformulate forward guidance on the timing of the rate-lift-off post APP. To summarize, the accounts showed a high degree of division, but gave few new insights on the ECB rate hike path. A rate lift-off in July still looks the most probable scenario.
• On FX the dollar failed to play its save haven role. The DXY index declined from 103.80 to currently 103.15. This was partially due to a further decline in USD/JPY (127.35). Remarkably, also the euro is gaining against the greenback with EUR/USD rising to the 1.055 area from 1.1046 this morning. An explanation isn’t that evident. Are FX markets discounting the risk of lower than expected US growth? The Swiss franc gained both against the dollar and the euro (EUR/CHF 1.0265). Sterling today weathered the risk-off storm rather well with cable returning to the 1.246 area against a weak dollar and EUR/GBP little changed near 0.8470 ahead of tomorrow’s key UK retail sales data.
• Indonesian president Widodo announced that the export ban on palm oil, in place since April 28, will be lifted from May 23. That export ban was one of the first examples of food protectionism since the Russian invasion in Ukraine started. A more recent example is the Indian wheat export ban. The decision came after considering improvements in local supply and prices and after checking with the 17 million FTE industry. Palm oil prices dropped more than 6% after the announcement to 6500 Malaysia Ringgit per metric ton. That’s still some 25% higher than at the start of the year though and compares with less than 3000 MYR/MT ahead of the pandemic.
• The South-African Reserve Bank accelerated its tightening cycle with a 50 bps rate hike from 4.25% to 4.75% in a 4-1 vote. The dissenter wanted another 25 bps move, like the SARB’s previous other three steps in this tightening cycle. The SARB slightly downgraded this year’s growth forecast from 2% to 1.7% while keeping the predictions for 2023 and 2024 unchanged at 1.9%. Headline inflation was upwardly revised to 5.9%-5%-4.7% over the 2022-2024 period. Under these assumptions, the SARB rate should be lifted to 5.3% by the end of this year, peaking at 6.75% in 2024. That’s a slightly steeper path than previously envisioned. The ZAR profits with USD/ZAR dropping from16.03 to 15.78.