We’ve started the day with UK March inflation numbers spike to a 30-yr high of 7% Y/Y, with the peak not yet in place. The unexpected fresh acceleration strengthens market thinking that the Bank of England won’t be able to pause its tightening cycle this year to avoid amplifying the developing cost-of-living crisis. A May 5 25 bps rate hike is fully discounted with more and more investors betting on a larger 50 bps move as global central banks following the Central-European example of stepping up the tightening cycle. The Reserve Bank of New Zealand this morning provided the latest evidence by lifting the policy rate from 1% to 1.5%. UK Gilts underperform US Treasuries and German Bunds. The UK yield curve bear steepens today with yields adding 1.7 bps (2-yr) to 3.6 bps (20-yr). Sterling showed no immediate response, but EUR/GBP is drifting south in lockstep with EUR/USD going into tomorrow’s ECB meeting. The pair trades around 0.8315 with first intermediate support around 0.8308/0.8296. Today’s eco calendar had little more to offer apart from -surprise, surprise – an acceleration of US producer prices in March (1.4% M/M and 11.2% Y/Y). Yesterday’s general market trends in Europe/US just continued in these setting. Especially US Treasuries gain some additional relieve (at the front end) in a move that started after the March US CPI release. The US yield curve bull steepens with yields dropping by 11.6 bps (3-yr) to 0.9 bps (30-yr). German yield lose around 0.5 bps to 1.5 bps across the curve. Brent crude’s leap towards $107/b (from <$100/b yesterday morning) has no significant impact on bond markets. EUR/USD remains in the defensive despite this relative yield development as investors don’t want to be wrongfooted by ECB’s Lagarde tomorrow. The pair drifts towards the 1.0806 YTD low. The Japanese yen is probably today’s biggest victim from the higher oil price. USD/JPY moved beyond the 2015 high of 125.86 to trade above 126 for the first time since 2002. It prompted a verbal intervention from Japanese FM Suzuki who said that sudden moves in the FX rates are very problematic which the government will watch with great care. JPY wasn’t really impressed by this intervention hint.News Headlines
Leading German economic institutes in a collective assessment on the economy downwardly revised their growth forecast for the country to 2.7% this year from 4.8% in the autumn of last year. The downward revision was mainly due to the impact of the war in Ukraine. However, also a more negative development of the pandemic during the winter than previously expected caused a ‘lower starting’ point for this year’s growth. GDP growth is expected to accelerate to 3.1% next year up from 1.9% previously. Inflation this year is expected at 6.1% with prices rising another 2.8% next year. These forecasts assume that gas supply from Russia will continue and that there will be no further economic escalation related to the conflict. In a scenario of a complete stop of Russian gas deliveries, the institutes see economic growth slowing to 1.9% this year and an economic contraction of 2.2% next year. Such a stop would cost the German economy a cumulative loss of €220bn over 2022 and 2023 combined.
According to a news topic at a state-run Television reported by Bloomberg the Chinese state council reiterated its commitment to use monetary policy tools including a reduction in the Reserve Requirement Ratio (RRR) in order to step up financial support to the economy, in particular industries and small business that are hit hard by the pandemic. This commitment of economic support comes as the economic outlook for Chinese growth worsens as lockdowns measures were put in place in several important economic centers including in Shanghai. This economic setback was also visible in the Chinese trade data this morning. Imports in March unexpectedly declined (-0.1% Y/Y in USD terms). The decline might both be due to logistical/transport disruptions because of the COVID lockdowns as well as the result of a slowdown in domestic demand.