Market movers today
Focus continues to be on the US-China trade war, weakening macro data globally and the potential for central bank easing . US ISM manufacturing dropped further yesterday to 52.1, the lowest level in 2½ years, adding to evidence that the US economy has joined the global slowdown with few engines left pulling.
Today's main event is the inflation print out of the euro area . In April, the 'Easter effect' pushed core inflation up by 0.5pp to 1.3% y/y but the May print will probably be a more reliable guide to the trend in actual underlying inflation pressures. As the Easter boost to travel-related service prices wanes, we expect both headline and core inflation to drop back in May, to 1.6% and 1.1%, respectively (see also Euro Area Research - Inflation under the microscope: simmering, not boiling ). It leaves the ECB with a rather bleak picture of still too low core inflation and the expected recovery being threatened by trade war escalation and weaker Chinese growth. Market inflation expectations also keep falling and are back at the lows seen in 2016.
US Fed Chair Powell will speak this afternoon as part of the 'Fed listens' event. The theme will be monetary policy strategy, tools and communication practices. Although the speech may not entail guidance for new policy signals near term yet, the speech is important as part of the revisit of the monetary policy framework/target discussion. Watch out for interviews on the sidelines of the conference. Note also our new Fed piece calling for a rate cut in Q3: FOMC Comment - Dovish policy signal to pave the way for an upcoming insurance cut , 31 May 2019.
In Scandi, we get Swedish industrial orders and production and we also get Danish FX reserves for May (see more on the next page).
Selected market news
Yesterday, the Fed's Bullard (dove, voter) became the first FOMC member to open the door for a rate cut . Bullard said a "downward policy rate adjustment may be warranted soon to help re-centre inflation and inflation expectations at target and also provide some insurance in case of a sharper-than-expected slowdown". Markets are now pricing in 50bp of rate cuts by the Fed in 2019 and a further 50bp easing in 2020.
Financial markets have been fairly calm overnight . Asian stocks are a bit lower while the S&P futures and bond yields are trading sideways. The trend is still lower, though, and US bond yields reached a new low last night before rebounding a bit again in Asia. Nasdaq took another beating yesterday as the US government is moving towards a major antitrust probe that could hit big tech companies such as Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL).
The Reserve Bank of Australia this morning became the first major central bank to cut rates as the key rate was lowered to 1.25% from 1.5% in line with consensus expectations.
The US top trade negotiators yesterday shot back at China in a joined statement stating disappointment over China's blame game. It is a response to the Chinese White Paper released over the weekend that blamed the US for the trade war.
Scandi markets
Swedish data today includes private sector production (industry, services and construction) and industrial orders. March order data was particularly weak, showing a 4.9% m/m decline, so some correction there seems reasonable even though other, survey based, data confirms that orders have softened somewhat of late.
Fixed income markets
The global fixed income rally continued last night as US tech companies came under pressure as the news broke that Google and Facebook are under FTC antitrust investigations. 10Y yields dropped to 2.08% and 2Y yields to 1.84% and the 2s10s curve steepened. The steepening got a boost as Fed member Bullard said that the Fed might need to cut rates soon. Today, we have Powell on the wires speaking at the Chicago Fed Conference. We would not be surprised if he acknowledges the need for more stimuli from the Fed.
Periphery markets performed yesterday, with Italy taking the lead as Italian PMI surprised to the upside contrary to other Euro zone countries. The rally also in Spain and Portugal underlines that there is still a very strong ‘hunt for yield’, with 10Y Germany trading at -20bp.
Today, we have Austria in the market tapping the 10Y and 15Y benchmark bonds. Given the pick-up to core, we expect good demand in the current low-yield environment. The Danish DMO will tap the 2y and 10y benchmark bonds. The drop in yields has accelerated the drop in duration in the Danish mortgage callable market and we expect good demand for the 10Y bond. The 2y bond is supported by high excess liquidity and a growing FX pick-up for EUR- and USD-based investors that hedge the currency risks.
FX markets
USD sold off broadly after the Fed’s Bullard blinked late yesterday, when he argued a rate cut may be warranted soon. We have stressed numerous times (and again in FX Strategy Risk off: winners and losers) that a key driver for FX markets would be if the Fed started to acknowledge dovish market pricing. Bullard’s comment was a first step in that direction, but the market likely needs more confirmation (and at some point action) for further selling USD.
The GBP weakened against EUR on a day full of headwinds. Softer UK PMIs, compression of Italian sovereign spreads and marginally negative but not too surprising comments from Boris Johnson combined to send the GBP lower. If indeed we are about to see a weakening of domestic data in UK combined with euro spread compression, the EUR/GBP could move towards 0.9., although this is not our main scenario. Nonetheless, forecasters have been surprised by strong UK data and a turn towards weaker growth indicators could fuel some short-term headwind for the GBP, even if Brexit news ise neutral.
Lately the SEK has been sentiment- rather than macro-driven. EUR/SEK dropped last week despite poor Swedish data and yesterday it edged slightly higher despite two strong numbers (retail sales and PMI). We have noted that the SEK has behaved more like the JPY and the CHF recently, indicating that part of the flows is related to its status as a funding currency.
