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German Bund yields in fixed income markets gapped lower at the open this morning, catching up with US Treasuries late yesterday and in Asian dealings this morning. The drop was followed by a drift higher only to reverse course again after some comments from Villeroy. The French ECB governor said he’s open to rate cuts at each meeting after June, which would mean a total of five this year. Unrealistic, clearly, but after the recent Bund sell-off it didn’t go unnoticed. The Dutch policymaker Knot was more neutral, keeping the door open for June but calling discussions about what happens afterwards premature. We also want to give him credit for pimping Lagarde’s now widely used “we are not Fed-dependent” one-liner to “we aren’t the 13th Fed district”. Anyway, German yields do add a few basis points but that was probably inspired by reports of Israel and the US holding talks on a Rafah offensive. Oil prices extended earlier gains amid risks of geopolitical tensions flaring up again and that supported yields too. German rates add up to 3 bps at the front. US Treasuries marginally underperform, triggered by lower-than-expected weekly jobless claims (212k vs 215k) and an unexpected sharp improvement in the Philly Fed business outlook from 3.2 to 15.5 (2 expected) – the highest since April 2022. Prices paid, new orders and shipments all jumped with this 6-month ahead gauge suggesting solid growth going forward. On the flipside, the employment index edged down to -10.7 and the workweek index fell sharply from -0.2 to -18.7. US rates nevertheless extended earlier gains to trade between 2 and 4.2 bps higher across the curve. The US dollar found a bottom at the start of European dealings and clawed back some more losses after the data releases. DXY tries to recapture 106. EUR/USD is slightly down for the day, trading at around 1.065. USD/JPY bounced of the 154 big figure. Sterling found its composure after sliding against the euro yesterday. EUR/GBP eased to 0.8556 in, yet again, technically insignificant trading. European stock markets rise marginally to the tune of 0.2%. Equity markets on Wall Street open mixed with the likes of the S&P and Nasdaq coming close to first support levels around 4990 and 15596.

News & Views

The German Bundesbank turned a bit less negative the economy in its April monthly report. Contrary to what was expected last month, the Buba now thinks real GDP increased slightly in Q1. This expectations is based on recent slight increase in industrial production, which was supported by a rise in goods exports. Exceptionally mild weather in February also led to an extraordinarily strong increase in construction output. Even so, the Buba stays cautious on the recovery going forward. Higher financing costs and increased economic uncertainty are dampening investment activity. Demand for German industrial products from Germany and abroad remains weak. Private households continue to be hesitant in their spending, despite a fairly stable labor market, sharply rising wages & falling inflation rates. The Buba concludes that an increase in output in Q2 remains uncertain, but at the same time acknowledges recent improvement in business sentiment (Ifo), opening the possibility of the economy picking up more significantly than was expected until last month.

MPC member Jan Prochazka of the Czech National Bank (CNB) in an interview indicated that the bank should maintain the current pace of 50 bps rate cuts at the next policy meeting on May 2. Prochazka sees little room for the CNB to accelerate the process going forward. Prochazka draws comfort from headline inflation having returned to the 2% target, but remains concerned about the structure of price developments. The decline in headline inflation was mainly driven by food and energy costs, but there is basically no disinflation happening in services. In this respect an improvement in economic activity/domestic demand also is a reason for caution. Aside from persistent inflationary risks, hawkish signals from the US Fed are also seen as preventing the CNB from accelerating rate cuts. He labelled the delay in rate cuts abroad as the ‘biggest source of change’ in the CNB forecast. In this respect Prochazka indicated that he doesn’t see the need to push back against current market pricing which discounts the policy rate to be reduced to 4.0% in a 12-month horizon from 5.75% currently.

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