• This morning Chinese authorities/the PBOC indicated they will continue to support the economy and promote healthy and stable financial markets. This gave some conform after investor worries about a sharp cooling of Chinese growth due to new lockdowns put markets in outright risk-off mode yesterday. Asian equities showed a mixed, still sightly unconvincing picture, despite a solid close on WS. European indices also regain part of yesterday’s setback with the Eurostoxx rebounding about 0.50%. However, Russian foreign minister Lavrov warning on the risk of a nuclear escalation was just another illustration of the still unpredictable nature of the war in Ukraine, while diplomatic efforts continue at the same time. Yesterday, growth fears/the risk-off repositioning coincided with a substantial correction in commodities/setback in inflation expectations, triggering sharply lower core yields. The sell-off in oil and most other commodities slowed. For now however, it wasn’t enough to revive the uptrend in core yields. Especially US Treasuries are extending gains, with yields declining 9/8 bps in the 2/10-year sector. The very long end slightly underperforms (-5 bps). Eco data were not to blame. US durable goods orders (0.8% M/M) suggest ongoing heathy investment dynamics. S&P Corelogic CS 20 city house prices also rose a faster-than-expected 2.39% M/M and 20.20% Y/Y. The Conference Board consumer confidence (107.3) and the Richmond Fed manufacturing (14) came within the margin of consensus error. Later today, the US Treasury will sell $48 bln of 2-y Notes. Bunds followed the rebound in US Treasuries but underperformed with a mild curve flattening (2-y -2 bps; 30-y -3.5 bps). Changes in 10-y intra-EMU yields spreads versus Germany were very limited, with Greece the exception to the rule (10-y +10 bps) as the country announced to have mandated to tap a 2027 bond.
• On FX markets, the correction in US yields still hardly hinders a solid USD momentum. The trade-weighted DXY index touched yet another cycle top just below the 102 big figure. At the same time, by default euro weakness is also still in play as investors are eagerly awaiting clarity/hard interest rate support from the ECB. At 1.0675, the corona low (1.0636) is now really within striking distance. Sterling still also fights an uphill battle. Cable dropped below the 1.27 handle (1.2680). EUR/GBP gains a few ticks (0.8420). USD/JPY is the exception to the rule with the yen profiting from a less negative interest rate differential and maybe also from the new economic support package.
• Japan has unveiled another emergency relief package amounting to 13.2tn yen ($103bn) to soften the blow from rising energy and raw material costs. The plan is made out of four pillars: curbing oil prices, ensuring a stable food supply, providing support for small and medium-sized companies and helping struggling households. Some 6.2tn yen will be direct government spending, such as cash pay-outs to low-income households with children and subsidies to gasoline wholesalers to depress retail prices. The remainder consists of measures including private-sector lending. “We must prevent rising fuel and raw material costs from disrupting a recovery in economic and social activity from the pandemic,” PM Kishida justified the fiscal boost at a time many other Western countries are gradually phasing out crisis measures. The yen strengthens today. USD/JPY declines to the low 127 area.
• The Hungarian central bank raised its base rate by an expected 100 bps to 5.40%. The interest rate corridor was also lifted with the same amount. The bottom O/N deposit rate now stands at the same 5.40% and the upper limit at 8.40%. The MNB remains very concerned about inflation, which rose to 8.5% in March with core measures even hitting 9.1%. Strong negative supply effects (war, sanctions, commodity prices) will push up inflation in coming months. It won’t reach the 3% target until the first half of 2024. Elevated inflation expectations with the increasing risk of second-round effects make it necessary to continue tightening until the inflation outlook stabilizes around the MNB target and risks become evenly balanced. Hungarian swap yields rise 0.5-10 bps today with the wings of the curve underperforming. The forint fails to profit with today’s decision discounted. EUR/HUF advances to 375.13.