• There was little hard eco news to guide markets at the start of the week. In its spring forecasts, the European Commission raised its forecasts for EMU growth to 1.1% for 2023 and 1.6% for 2024 (was 0.9% and 1.5% in February winter forecast). The better performance is due to a ‘terms-of-trade countershock’ caused by declining energy prices, by abating supply constraints, improved business confidence and a strong labour market. The EC also took notice of a decline in headline inflation due to lower energy prices but acknowledged that core inflation firmed, pointing to persistence of price pressures. The inflation outlook for EMU was upwardly revised to 5.8% for 2023 and 2.8% for 2024 respectively 0.2% and 0.3% higher than in the winter forecast. The ECB in its March projections saw inflation at 5.3% and 2.9% respectively. In a model-based analysis published at its website, the ECB estimates that policy tightening lowered inflation by around 50 bps in 2022, while the downward impact on inflation is expected to average around 2 ppts over the period 2023-25. The transmission to economic activity is faster, with the impact on GDP growth expected to peak in 2023 and a downward impact of 2 percentage points on average over the period 2022-25. Both reports were interesting, but had little direct impact on trading. Yields maintained the gains from end last week after surveys in Europe (ECB) and the US (U. of Michigan) indicated higher than expected consumer inflation expectations. Early in US dealings, the US Empire manufacturing survey tumbled sharply from 10.8 to -31.8 (vs -3.8 expected). The release temporary aborted a tentative further rise in US (but also European) yields. Even so, the (negative) impact on yields after all remained limited. In an interview with CNBC, Fed’s Bostic repeated that he didn’t see a case for Fed rate cuts before well in 2024. In a slight steepening move, US yields are rising between 1.5 bp (2-y) and 4.25 bps (30-y). German yields also remain upwardly oriented rising between 2.0 bps (2-y) and 4.5 bps (30-y). Equities gradually lost opening gains early in US dealings and the disappointing Empire survey didn’t help. The Eurostoxx currently loses 0.25%. US indices open little changed/mixed.
• On FX markets, the dollar lost some momentum after last week’s rebound. Also here the big miss in the NY Empire survey didn’t help. DXY currently trades near 102.45 (open near 102.67). EUR/USD tried a (for now unconvincing) rebound (1.0875 vs open near 1.085). Near 136, USD/JPY trades off the intraday top, but still holds in positive territory. UK yields are rising even less than in the US or EMU. Still, sterling outperforms (EUR/GBP 0.8695) as markets are counting down to tomorrow’s UK labour market data.
News & Views
• Headline Swedish CPI rose by 0.5% M/M and 10.5% Y/Y (from 10.6%). Rent increases for rental apartments and higher interest rate expenses for both owner occupied housing and tenant owned apartments were offset by lower food prices (-1.3% M/M) and lower electricity prices. These numbers were close to consensus, but core inflation gauges decelerated more than expected. The Riksbank’s preferred CPIF gauge (with fixed interest rate) rose 0.2% M/M (vs 0.5% expected) with the Y/Y-outcome slowing from 8% to 7.6%. Stripping out energy, CPIF rose by 0.4% M/M and 8.4% Y/Y. Today’s inflation figures suit the Swedish central bank that argued on April 26 to conduct one final 25 bps rate hike in either June or September. The Riksbank is convinced to see a steep decline in inflation in coming months. This doesn’t bode well for the national currency. The Swedish krone is a cause of concern for the central bank. It’s weakness is an additional inflation risk. With data now supporting the Riksbank scenario, SEK risks losing even more interest rate support against the euro. EUR/SEK rose from 11.25 to an intraday high of 11.32. The pair remains in a strong uptrend with the 2020 high (11.43) and YTD high (technical resistance) at 11.48 lining up.
• Czech National Bank governor Michl said at a meeting with students at the Prague university of economics and business today that the CNB is considering whether to leave interest rates stable again or raise them at the June meeting in order for inflation to decline from current double digit levels to the 2% inflation target. Inflation is expected to dip to single digit levels from July. Michl affirmed that a strong currency is part of the CNB’s current playbook. He also reiterated that bets on a first CNB rate cut in Q3 are very premature. CZK lost some ground against majors last week as core bond yields corrected higher. EUR/CZK is testing the 23.60 upper bound of a narrow trading range in place since end March (23.20-23.60).