• UK gilt yields one again caught the attention today. They initially add another 6.5-10 bps following yesterday’s ugly CPI surprise which will almost certainly force the Bank of England into additional tightening. This time though, the long end of the curve joined the short end, which could mean markets have taken a less pessimistic view on the growth implications of a tighter monetary policy. Tomorrow’s UK retail sales are to give a glimpse on the resilience of the UK consumer. Is this the trigger sterling is waiting for to push beyond the current YtD highs (EUR/GBP today down to 0.868, near recent lows)? The whole curve in any case is now close to the levels seen in the aftermath of Truss & Kwarteng’s disastrous minibudget September last year. Another slew of central bank governors hit the wires. ECB VP de Guindos said wages and profits pose upside inflation risks. Nagel put it bluntly and said more tightening is needed to overcome high inflation. French governor Villeroy, typically holding a more centrist view, said policy rates should peak in the next three meetings. Assuming action on all three, that implies a 4% rate. He also noted that it may take monetary policy longer to hit the economy than we were used to in the past. Said otherwise: rates need to be restrictive for a long enough period. Despite the overall hawkish tone, the speeches failed to really inspire German yields (+2 bps at the front). US rates fluctuated within a tight range before a series of better-than-expected data shook things up. We’re talking about the Chicago Fed Activity Index, weekly and continuing jobless claims and the second reading of US Q1 GDP. Very much second-tier indeed and that makes the sharp yield jump so telling. The curve inversion deepens with the short end surging 8.5 bps after trading 2 bps or so in the red earlier. The 2y briefly ventured north of 4.5% before paring gains a bit. Markets are more and more convinced the Fed will have to hike a bit more (at one point a July hike was fully discounted) while further pushing back the timing of rate cuts. The dollar embraces the juicy interest rate support but a solid equity performance caps its gains (Nasdaq up 1.3%). DXY extends gains to 104.16, extensively testing the 104.089 resistance (23.6% recovery of the DXY 2022-2023 decline). EUR/USD currently loses the critical 1.0727 (23.6% retracement of the 2022-2023 rally) – 1.0735 (December 2022 interim high) support. In other US news, rating agency DBRS Morningstar followed Fitch in putting its triple A US-rating on review for a downgrade.
News & Views
• The Central Bank of Turkey (CBRT) as expected kept its policy rate unchanged at 8.5%. It said that economic activity in the earthquake zone has been recovering faster than expected and that it will not have a permanent impact in the medium term. The CBRT sees a stronger than expected positive contribution of tourism supporting the current account balance, even as an ongoing increase in domestic demand, high energy prices and weaker external activity remain risks to the external balance. Still a sustainable current account balance remains important for price stability. The MPC will continue to use tools supporting the effectiveness of monetary policy, with Liraization strategy an important part of this policy. The MPC will continue to prioritize the creation of supportive financial conditions in order to minimize the effects of the disaster and support the necessary recovery. The CBRT takes notice of recent improvement in the trend of inflation and still aims to reach the 5% inflation target over the medium term. The implementation of the Liraization strategy (including reversal in currency substitution and an uptrend in FX reserves) are also important to reach this goal. Still inflation and core inflation were 43.68% and 45.48% respectively in April. The lira today remained in the defensive against the dollar with the EUR/TRY cross rate nearing the 20 mark (currently 19.93) as markets are counting down to the second round of the presidential election.
• The monthly index of report sales in retailing from the Confederation of British industry indicated a decline in retail sales in May. The index declined from + 5 in April to -10 in May. The orders placed index also declined from 1 to -30. Sales for the time of the year also deteriorated from 21 to -18. However, the indicator for expected sales improved slightly from -7 to 0. According to CBI a future improvement might be supported by an improvement in consumer confidence and a decline in energy prices. According to the May quarterly survey, reported selling prices remain elevated (77 from 80) while both reported (-48 from -12) and expected employment (-49 from -16) in retailing declined sharply. Tomorrow morning, the official ONS April UK retail sales will be published.