Markets
Core bonds dropped with a continued rise in oil prices ($88.5/b) serving as a common factor. German Bunds underperform US Treasuries. That’s partially a catch-up move as European markets missed out on US action yesterday (Easter Monday). German yields add between 1 (2-y) to 14.3 bps (30-y). The curve steepening (less inverse) happens against the background of the ECB survey showing consumer inflation expectations decreasing to 3.1% for the 1-year ahead gauge (but stabilizing at 2.5% longer term (3-y)) as well as German actual inflation figures coming in slightly below consensus. Prices rose 0.6% m/m in March. That’s a lot but given the high bar last year (1.1% m/m), it still caused the yearly figure to ease from 2.7% to 2.3%. After last week’s Spanish and French outcome, the risks for tomorrow’s euro zone reading (0.9% m/m, 2.5% y/y) are marginally tilted to the downside. They are likely to cement expectations for a less restrictive monetary policy stance in the near term at a time when the economy is already bottoming on its own. Money markets in the region fully price in the inaugural June ECB cut. With another (close to) three in the pipeline, we think that’s more than enough for 2024. US rates continue down Monday’s path, adding between 1.7 (2-y) to 8.2 bps (10-y) in a similar curve shift. All maturities but the 2-y are either heavily testing (3-7 year bucket) or pushing through (10 year and longer) to new year-to-date highs, regardless of the fact that there’s still some important data to be published today (JOLTS) and later this week (services ISM, payrolls). US money markets push back the timing for a first Fed rate cut, with not even July fully discounted.
Bund underperformance helps the euro to hold ground against the dollar, but only barely so. EUR/USD tested the upper bound of the 1.0724 (December correction low)/1.0695 support area. The pair is currently changing hands in the mid 1.07/1.08 area, nothing more than a few ticks higher than yesterday’s close. DXY (trade-weighted dollar index) returned south of 105 in technically insignificant trading. USD/JPY is still eager for a topside break above 152, regardless of the verbal warnings from BoJ/Japanese government officials. USD/CNY meanwhile crept higher to the highest level since mid-November (7.236) in a sign Chinese authorities do allow a further CNY depreciation, provided the process goes gradually.
News & Views
The ECB today published its monthly consumer expectations survey from February. The median rate of perceived inflation over the previous 12 months decreased from 6.0% in January to 5.5%. Median expectations for inflation over the next 12 months also eased from to 3.1% from 3.3%, the lowest level since the start of the start of the war in Ukraine in February 2022. Expectations for inflation 3-years ahead were unchanged at 2.5%. With respect to demand and activity, European consumers saw nominal income growth rising from 1.2% to 1.4%. Perceived nominal spending growth over the previous 12 months eased from 6.6% to 6.4%. Consumers expected spending to grow 3.7% over the next 12 months (unchanged) but still see an contraction of economic activity of -1.1% in the coming year. They also expect unemployment remains unchanged at 10.9% versus 10.5% currently perceived. As a reference, the official EMU unemployment rate (Eurostat figures) was 6.4% in January. Consumers expect the price of their homes to increase by 2.4% in the coming year (2.2% previously). Mortgage rates are seen unchanged at 5.1%.
The Swedish Riksbank today made a submission to the Riksdag with a proposal to restore its equity to the statutory base stipulated in the Sveriges Riksbank Act. The proposal involves a capital injection of SEK 43.7 bln in 2024. The RB is obliged to make such a submission if the reported equity falls below one third of the target level. After the allocation of 2023 profit, equity is expected at SEK -2 bln compared to a statutory base level of SEK 41.7 bln. The Riksbank reported a loss in 2022 caused by a sharp rise in interest rates both in Sweden and abroad due to a rapid increase in inflation. The higher interest rates decimated the market value of the RB’s bonds in Swedish krona and foreign currency. This unrealised loss caused the Riksbank’s equity to become negative. RB governor Thedéen assesses that a negative equity does not affect the RB’s ability to conduct monetary policy short-term. However it is necessary that the RB is financially independent to maintain confidence in an independent policy longer term.
