• The bond market rally from earlier this week took a breather this morning. With no more than two 25 bps ECB interest rate hikes discounted through summer and expectations for an additional Fed hike pushed back to July, one might have expected the case to push for more dovishness to have become less compelling, unless it would be backed by outspoken soft data. Indeed, EMU May headline inflation dropped from 7.0% to 6.1%. Core inflation also slowed more than (initially) expected from 5.6% to 5.3%. However, this was no big surprise after national data released earlier this week. Still, 5%+ core inflation is far from a guarantee for the ECB to be sure it is on track to sustainably return inflation back to 2.0%. In the accounts of the early May ECB meeting, developments on core inflation was still seen as a major source of concern. In this respect, ECB ‘hawks’ wanted a directional bias, clarifying that, despite slowing down the pace of hikes to 25 bps, further steps would be warranted. The EMU CPI release left few traces on (interest rate markets). However early in US dealings, yields reversed the early rise, probably as markets still pondered yesterday’s guidance from Fed governors Harker and Jefferson to ‘skip’ a June rate hike and take time to asses incoming data. The ADP labour market report at least didn’t bring much of a strong case for the ‘skip’. 278k of additional US private sector jobs in May again beat the consensus by a wide margin. Jobless claims at 232k also suggested persistent labour market strength. However, a downward revision of the Q1 US unit labour costs from 6.0% to 4.2% was enough to push daily yield changes back in red. Whether this ‘outdated’ series is important input for the Fed’s assessment is subject to discussion. Even so, US yields currently are ceding between 3.5 bps (2-y) and 6 bps (5-y). After finishing this report, the US manufacturing ISM still has to published. The price action on the early morning data at least suggests a tentative dovish bias going into the release. German yields also reversed an initial rise to currently cede up to 3 bps (10-y). Better than expected Chinese data (Caixin PMI) and a (potentially/hoped for) more benign inflation environment initially supported a comeback of European equities. However, the intraday dynamics is far from convincing. The Eurostoxx 50 only gains 0.45% after yesterday’s 1.7% decline. US indices open little changed.
• On FX markets, the dollar eases off recent peak levels. DXY is at risk of falling below the 104 big figure. EUR/USD tries to regain the 1.07 barrier mainly on USD weakness rather than on outright euro strength. It’s too early to call off the downward alert. USD/JPY is further drifting off the 140 barrier (139.10). Sterling continues outperforming both the dollar (Cable 1.2475) and the euro. At EUR/GBP 0.858, key 0.8547 December low is coming with reach.
News & Views
• The National Bank of Belgium upwardly revised the Q1 GDP figure from 0.4% Q/Q to 0.5% Q/Q (1.4% Y/Y from 1.3% /Y). Details were constructive. Household consumption rose by 0.6% Q/Q, with the increase driven by purchases of non-durable goods. Business investment grew by 1.9% Q/Q while government consumption declined by 0.7% Q/Q. Inventories decreased by 0.2% Q/Q. Imports and exports of goods and services both contracted 1% in Q1 (net export 0%). In the supply-side breakdown, value added in the manufacturing industry declined by 0.6% Q/Q. The services sector grew by 0.8% Q/Q and the building industry by 0.3% Q/Q. Domestic employment rose by 0.3% Q/Q (1.3% Y/Y). Separately, StatBel reported a 9.8% annualized increase in the hourly labour cost in Q1 2023, which is the strongest since the start of the series in 2000. The sharpest increase is registered in Accommodation and food service activities with 10.5%, while the lowest increase was observed in Electricity, gas, steam and air conditioning supply with +7.7%.
• The Slovak Republic raised €2bn today via a new 10yr syndicated deal. Order books totaled over €7.7bn, resulting in a significant price concession compared to initial price takings in the MS +95 bps area and revised guidance at MS +85 bps. The bond was eventually priced at MS + 80 bps. Slovak debt agency Ardal is well-advanced with this year’s funding. YTD, they now raised €8.26bn. The lion share of the amount came from today’s syndication and from two other benchmark deals in February (€2bn Feb2035 & €1.5bn Feb2043). In its official funding plans, Ardal estimated this year’s gross borrowing requirement at €13bn, but they aimed for only €8bn of bond issuance with EU funds and the cash buffer doing the rest of the job.