• Investor focus remains centered on public finances as trade wars shifted to the background following the US-Sino truce. Global yield curves extend their bear steepening run with attention obviously on the US. US President Trump’s big beautiful bill cleared another hurdle today as House Republicans reached an agreement on raising the deduction cap for state and local taxes. The SALT increase paves the way to meet Republican House Speaker Johnson’s self-imposed deadline to pass the legislation in the House Rules Committee by Thursday and in the lower house by end of this week, ahead of Memorial Day. House Republicans currently hold a narrow 220-213 majority in the lower house (2 vacancies) suggesting they need everyone, also the spending hawks, on board to pass legislation. Markets rightly worry that these expansionary fiscal proposals will further damage already unsustainable public finances. US yields today add 3 bps to 5.3 bps (30-yr) as investors also eye tonight’s $16bn 20-yr Bond sale. Weak demand at a Japanese sale with a similar majority triggered a massive sell-off in JGB’s earlier this week. We believe that it’s only a matter of time before the US 30-yr yield tests the 2023 top at 5.17% and even takes it out to hit highest level since 2007. German Bund yields follow the bear steepening move with yields 2.7 bps to 6.2 bps up on the day. UK gilts even slightly underperform, especially at the front end of the curve following this morning’s April CPI report. Daily changes vary between +4.1 bps (2-yr) and +6.8 bps (30-yr). The UK 30-yr yield is only 10 bps away of reaching its highest level since 1998. Headline inflation accelerated to 1.2% M/M (vs 1% expected) with the annual number rising from 2.6% Y/Y to 3.5% Y/Y. Core and services inflation respectively surged to 3.8% Y/Y and 5.4% Y/Y, pushing expectation on the next BoE rate cut to November. Sterling failed to profit as the pressure on long term (core) bonds starts spilling to general risk sentiment. Main European indices cede 0.5% today with US stock markets opening up to 0.75% lower. USD/JPY (143.71) drifts towards the key 140 support area. EUR/USD extends this week’s rebound, from 1.1283 to currently 1.1335. Brent crude prices hold this morning’s gains on the back of CNN reports of plans of a potential Israeli attack against Irani nuclear facilities.
News & Views
• South African inflation by rose 0.3% M/M and 2.8% Y/Y in April, in line with March (0.4% M/M and 2.7%% Y/Y) and marginally higher than expected. The increase was mainly due substantially higher food prices (1.3% M/M and 4% Y/Y). Fuel prices (-3.2% M/M & -13.4% Y/Y) partly offset the increase. The trimmed mean core inflation measure printed at 0.1% M/M and 3.1% Y/Y. The Reserve Bank of South Africa has an inflation target range of 3%-6% and its policy rate stands at 7.5%. Current low inflation in theory allows the SARB to cautiously ease its policy rate at the May 29 policy meeting. However, inflation might again pick up in H2. Recently, there were also indications from the Deputy Finance Minister that the government might consider lowering the SARB inflation target, but there is no consensus yet on the issue. The Government also published its third revised budget proposal. It downwardly revised the growth projection for this year from 1.9% in March to 1.4%. Growth for next year is seen at 1.6% from 1.7%. The new budget plans take into account spending cuts of ZAR 69.4bn over 3 year. The budget deficit now is seen at 4.8% from 4.6% in March and is declining to 3.8% in 2027/28. The debt to GDP ratio is expected to peak at 77.4% of GDP at the end of this year, from 76.2% at the previous proposal. After a brief weakening after Liberation Day to near USD/ZAR 20, the ZAR fully reversed these losses against the dollar, currently trading at the best levels YTD near USD/ZAR 17.9. The rand trades mainly stable after today’s budget announcement.
• Swedish Riksbank deputy governor Anna Siem indicated that “monetary policy is currently well-balanced and that it is at present wise to await further information to obtain a clearer picture of the outlook for inflation and economic activity” as the erratic trade and security policy creates uncertainty both with respect to demand and inflation. In this situation, the need to wait for reliable signals should not be interpreted as a reluctance to act. “The neutral interest rate level we are starting from provides us with favourable conditions to navigate the uncertain road ahead’. At its May 08 policy meeting the RB left its policy rate unchanged at 2.25%, but signaled that inflation might be somewhat lower than previously assessed. This could still suggest a slight easing going forward.
Graphs
USD/JPY: fiscal worries drive safe haven flows into JPY
US 30-yr yield: US Treasury faces challenging 20-yr auction tonight
Gold ($/ounce) shines again on fiscal/inflationary worries
USD/ZAR: ZAR easily reversed early Liberation Day losses in search of downside of trading band of the past two years
Table
Contacts
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