Markets
Geopolitics as a market theme tend to have a limited shelf life but investors this time really took it to the next level. Except for some minor bourse losses in Asia, Iran’s retaliatory attacks against Israel didn’t trigger the slightest risk aversion in Europe, quite the contrary. The EuroStoxx50 adds 1.5% and Wall Street rises 0.5-1%. Core bonds slipped. Yields gapped higher at the open with gains boosted by exceptionally strong US retail sales. The March edition crushed the bar, whatever the gauge, while the February readings were revised higher. Headline sales rose 0.7% m/m and core measures rose between 1 and 1.1%. 8 out of the 13 categories printed gains. The control group (excluding food, gas, building materials and car dealers) rose the most since February 2023 (1.1% m/m), boding well for the private consumption component in Q1 GDP growth. US yields jump between 7 and 9.5 bps across the curve with the likes of the 10y on track for a new YtD closing high. The 2y came less than 1 bp short of testing the 5% again. German yields add 6.6-7.2 bps. The Japanese yen greatly underperforms on currency markets with the risk-on mood and rising core bond yields bashing JPY to a new 34y low against the dollar. USD/JPY tops the 154 big figure. EUR/USD temporarily gave up all earlier gains after the retails sales were released. The pair hit an intraday low around 1.063, just shy of Friday’s YtD (intraday) low of 1.0623 before recovering marginally to 1.064 currently. Sterling strengthens against most peers in the run-up to an economic update that entails labour market data tomorrow, inflation figures Wednesday and retail sales Friday. EUR/GBP drops to 0.8534. Oil prices eased back below $90, suggesting few Middle East related supply concerns. Metal prices including aluminum do rise about 5% following the UK and US sanctioning Russian exports but that’s about half of the initial surge in Asian dealings.
More ECB speakers hit the wires today in the wake of the policy meeting last Thursday. Governing Council member Simkus sees a more than 50% of more than 3 rate cuts this year with a follow-up move in July after June. Slovakia’s Kazimir opened the door for a cut in June but didn’t want to commit on a path after June. Chief Economist Lane noted that the further inflation path is going to be bumpy. He expressed confidence inflation is heading back to 2% but added wage gains and services inflation remains elevated. Their comments had no intraday impact on markets.
News & Views
The Swedish government presented its 2024 Spring Budget today against the background of significantly falling inflation while the Swedish economy is in recession, with low GDP growth and rising unemployment. CPIF inflation is expected to average 2.1% this year, followed by 1.7% next year and 2% in 2026. GDP growth is set to accelerate from 0.7% this year, to 2.5% next year and 3.2% in 2026. Against this background and given fiscal leeway, Minister of Finance Svantesson presented an additional spending budget of SEK 17.3bn. The proposals are meant to navigate Sweden through the recession and safeguarding the welfare system, improve law enforcement and safety and security and stronger defense and crisis preparedness. The government forecasts a 1.2% of GDP budget shortfall this and a small 0.3% deficit in 2025 before returning to budget surpluses. The debt to GDP ratio is expected to peak at 31.8% this year, before falling back to 31.5% and 30% over the next two years. The Swedish krona recovers somewhat today in a better risk environment after testing the EUR/SEK YTD high just above 11.60 last week.
Rating agency Fitch commented on the Belgian pensions reform bill, approved by Federal Parliament earlier this month. Fitch judges that reforms (introduction of pension bonus, increased requirement to obtain the minimum pension, cap on the growth of some pensions to civil servants,…) are insufficient to alleviate the increasing cost pressures of an ageing population on public finances. Their positive impact is largely offset by an earlier increase in the minimum pension. Political fragmentation continues to complicate fiscal adjustment efforts in the face of high and rising public debt. This is also reflected in Fitch’s negative outlook on the AA- rating. A parliamentary monitoring committee suggested that the fiscal deficit would rise to 5.6% of GDP by 2027 (from 4.3% last year) in a no-policy change scenario. Inflation indexation is also having a negative net impact on the budget balance with general election and a potential political standstill looming as the next risk factor.
