Sunset Market Commentary

Markets

With US and UK markets closed for a holiday yesterday, markets still showed some Monday-like slow trading dynamics today. German yields are changing less than 2 bps across the curve. Inflation expectations in the ECB April consumer survey declined slightly further (2.9% from 3.0% 1-year, 2.4% from 2.5% 3-year). Still this wasn’t really able to trigger any meaningful follow-through price action on yesterday’s tentatively soft comments from ECB’s Villeroy and Lane. Today, ECB’s Holzmann, a hawkish member within the MPC, indicated he supports a rate cut at next week’s meeting. He won’t automatically support moves afterward, but sees 2 rate cuts this year with a maximum of three. Given his usually hawkish bias, his assessment is pretty much in line with current market pricing. ECB’s Knot (also from the hawkish side) did strike a similar moderate tone as he expects policy rates to gradually become less restrictive as the medium term outlook on inflation improves. ECB Executive Board member Isabel Schnabel in a speech in Tokyo looked backward on the period of CB asset purchases (QE). She advocated that QE primarily should be used in times of crisis/financial turmoil. Outside this periods of elevated stress she advocated caution on using the instrument of asset purchases as long-term costs could outweigh benefits. In this respect, especially in a bank-based economy (as is the EMU) other measures such as long-term refinancing operations, might offer a better risk-reward balance.

In technical trading US yields are changing between -4.0 bps (2-y) and +1.0 bp (30-y). Consumer confidence of the conference board will still be published after concluding this report. Equities show a mixed picture The EuroStoxx 50 opened stronger but momentum dwindled (currently -0.6%). The Nasdaq at the open still touched an all-time record, but also struggles to extend gains.

Low volatility in bonds and equity markets is keeping the dollar in the defensive. EUR/USD came close to the 1.0895 ST top, but a real test/break didn’t occur (currently 1.0875). DXY eases to 104.4 (from 104.57). USD/JPY is blocked in an extremely tight range just below the 157 big figure. EUR/GBP continues testing the 0.85/0.8492 support area, but for now no clean break occurred. UK data were mixed today with BRC shop prices slowing further disinflation (0.6% Y/Y in May from 0.8%), but stronger than expected CBI retail sales published later today (cf infra).

News & Views

The Confederation of British Industry’s (CBI) monthly retail sales balance recovered from -44 in April to +8 in May (best since December 2022). The indicator compares sales versus a year ago. The dismal April figure could have been an outlier (February: -7; March +2) linked to timing of Easter and bad weather. The highest number of retailers felt sales being normal for the time of year in eight months. Retailers expect the volume of sales to moderately fall in June (-4) though we must add that they expected them to fall -19 this month. CBI’s lead economist believes that falling inflation and continuing real wage growth will contribute to a healthier consumer outlook, in turn supporting the retail sector further. Results from a separate quarterly survey on sales of UK retailers pointed to the slowest pace of selling price inflation since August 2020 (below long-run average).

The Hungarian Debt Management Agency (AKK) announced modalities of a new retail bond, the Hungarian Government Security Plus (MAP Plusz). The retail note pays an annualized interest rate of 6.73% over its 5-yr term via a yearly step-up coupon starting at 6.25% and gradually rising to 7.25%. MAP Plusz will be redeemable at par value once a year during a 5-day period following the interest payment. AKK experimented with this product before, launching a similar one in 2019. At the peak of its success (turn 2021-2022), there was more than HUF 6300bn outstanding. It lost its appeal as inflation accelerated but HUF 740bn is still invested and will soon mature. ÁKK’s target regarding the retail government securities market remains unchanged at obtaining a net portfolio growth worth 2% of GDP in 2024. Another retail bond, the One Year Hungarian Government Security (1MAP) which currently has a 6% annual interest rate, will be phased out.