• Russia yesterday moved to a next phase in the war of retaliatory economic sanctions, cutting of gas supply to Poland and Bulgaria as they refuse to pay in ruble. However, the market reaction was ‘remarkably’ guarded. Risk sentiment even improvement after yesterday’s outright risk-off session. European equities trade with modest gains (0.0%/0.5%). US indices also regained an, albeit limited, part of yesterday’s steep losses. Positive earnings from bellwethers (Microsoft, Daimler amongst others) apparently supported some dip-buying. European gas prices jumped sharply higher at the open, but intraday gains gradually eased. Crude oil also maintains most of yesterday’s gain but near $104 p/b, Brent currently trades in what has become ‘familiar’ territory. Other commodities like iron ore or copper stabilized or gain slightly. Maybe the explanation is a bit more positive as it might be (partially) inspired by China’s intentions to engage in big infrastructure projects to support ailing economic growth. Aside from a more constructive equity performance, interest rate markets also entered calmer waters. After tumbling sharply lower yesterday, the US yield curve succeed a modest bear flattening trend with the 2-y yield rising 4.5 bps and the 30-y gaining 2.5 bp. There is no Fed speak due to the black-out period ahead of next week’s policy meeting and visibility on growth and inflation for sure didn’t improve. However, after yesterday’s correction, markets concluded that there is no profound reason yet to question the Fed guidance on aggressive policy frontloading. German yields, which decline less than their US counterparts yesterday, show a bull flattening trend with yields are ceding up 5.5 bps (2-y/5-y) to 1.5 bp (30-y). The escalation in economic sanctions between Russia and the US apparently causes further uncertainty on decisive ECB policy action. It also doesn’t help peripheral bond markets. In a daily perspective, widening remains modest. However, at 177 bps the 10-y Italian spread is near the highest level since June 2020.
• No change of trend on the FX market. The dollar continues to shine with the DXY index testing the corona top at 103. At the same time, the picture of the euro looks ever more ugly. EUR/USD fiercely cleared the previous YTD low at 1.0636, currently trading at 1.0560, the lowest level since March 2017. The EUR/USD 1.0341 (2017 low) and even the parity level are looming on the horizon. After a brief setback, USD/JPY also resumes its uptrend (128.1). As investors are counting down to tomorrow’s BoJ policy decision. Sterling remains in the defensive as cable (1.255) set a new correction low, but outperforms an even weaker euro (EUR/GBP 0.841). In CE markets, the zloty (EUR/PLN 4.70) and Czech krone (EUR/CZK 24.5) regain slight ground after yesterday’s setback. The forint underperforms with EUR/HUF testing the 380/382 resistance area.
• The German government cut the 2022 outlook from 3.6% to 2.2%, a move that reflects the impact of soaring prices on consumers and companies, burdened by uncertainty from the war in Ukraine. Growth is expected to pick up marginally in 2023 to 2.5%. Germany’s Economy Ministry predicts inflation to average 6.1% this year before slowing down to 2.8% in 2023. Both growth and inflation dynamics depend largely on geopolitical developments. Russia cut off gas flows to Poland and Bulgaria and threatened to do the same with other countries labeled “unfriendly”. This includes Germany and, if targeted, may affect output and prices dramatically in a stagflationary way. German inflation numbers are due tomorrow while Q1 GDP numbers will be published on Friday.
• The US’s goods trade deficit soared to a record high in March. The balance came in at -$125.3bn, the biggest deficit ever recorded and eclipsing the previous record in January of -$107bn. At first glance, this may negatively affect Q1 GDP numbers (due tomorrow) through lower net-exports. Another batch of US data, however, showed a strong inventory buildup in both February (2.6% wholesale, 1.5% retail) and March (2.3% and 2%), contributing positively to GDP. It suggests the US seized the opportunity of restocking via imports before new snarls hit supply chains (eg. China lockdowns).