Markets
Core bonds took a breather after last week’s violent sell-off. But Japanese markets indicated otherwise this morning. Long-term bonds have come under strong pressure, with yields rising by as much as 20 basis points at one point as a result of another increase in oil prices and the Takaishi administration’s consideration of an additional debt-financed budget for relief measures. Net daily changes were set at around 9 basis points (40 years) on the high end. European investors showed little desire to build on early Asian oil price gains (up to 2.5% to $112 per barrel). The price of black gold was already declining marginally before a report by Iran’s semi-official Tasnim news agency accelerated the decline. She said that the United States proposes a temporary exemption from the oil sanctions it imposes on the country, which will remain in place until a final agreement is reached. This news comes after US President Trump in recent days increased pressure on Iran, saying: “It better act fast, or there won’t be anything left of it.” Leaks reported by Al Arabiya said: “Iran seeks a long, multi-stage truce and a gradual and safe reopening of the Strait of Hormuz as part of a revised proposal. The report said that Tehran is ready to accept a long-term nuclear freeze instead of complete dismantling and wants to transfer enriched uranium unconditionally to Russia instead of the United States.” A barrel of Brent is currently trading at the $108 barrier. This gives the Bonds some relief. The front end produces an ease of 4 basis points. Treasury yields fell less than 2 basis points. Government bonds outperform with net daily changes of between -7 and -7.5 basis points across the curve. UK bonds were hardest hit in the latest global rout, as politics spiraled into a toxic mix of inflation and financial fears. Today’s slight recovery allows the British pound to rebound as well. EUR/GBP is falling to around 0.87. GBP/USD is bouncing towards 1.34. Most of the other major dollar pairs are seeing downward pressure on the dollar side of the equation. The EUR/USD pair breaks a four-day losing streak by rising to the 1.165 level. USD/JPY pared most of the early (Asian) gains to change almost unchanged around 158.7. Stock markets rebounded on (unconfirmed) geopolitical rumours. The EuroStoxx50 index turned losses into gains by 0.6%. Wall Street opened flat.
News and opinions
Today’s Origo Group survey showed inflation expectations among Swedish financial market players falling in May compared to April. Respondents’ expectations for annual inflation over a one-year horizon fell to 1.6% from 1.7%. Expectations for CPIF (with fixed interest rate) inflation over 2 years (1.9% from 2.1%) and 5 years (2% from 2.2%) also fell. Growth forecasts have barely changed with one-year GDP growth of 2.2% and two-year growth of 2.3%. Survey respondents believe the interest rate will reach 1.9% over one year and 2.1% (from 2.2%) over 24 months. The survey comes as the latest “challenging” inflation data for both CPIF and core gauge inflation in April were at very low levels of -0.6% m/m, 0.8% y/y, -0.8% m/m and 0.1% y/y. The lower level of inflation is at least partly due to the lower value-added tax on food at the beginning of April. However, readings that were well below target gave the Riksbank time to assess the impact of higher energy prices. The central bank maintained a cautious approach and left interest rates at 1.75% on May 7. He “guided” that “the current level of the interest rate gives the Riksbank a good initial position to adjust monetary policy if necessary to protect the inflation target.” Markets rule out a rate hike of just 25 basis points by September. The krone has recently been trading defensively, with EUR/SEK once again approaching the 11 level.
The Swiss State Secretariat for Economic Affairs revealed that GDP growth (adjusted for sporting events) accelerated to a quarterly pace of 0.5%, compared to 0.2% in the fourth quarter of last year. Markets expected a more modest rise of 0.4%. Initial estimates did not provide many details, but the report indicates that the industrial and services sectors contributed to growth. More detailed growth figures are expected to be published in early June. After testing the 0.90 EUR/CHF barrier in the early stages of the conflict in the Middle East, in the second half of March the Swiss franc lost some ground as the Swiss Central Bank stressed its readiness to intervene in the foreign exchange market when necessary. The range of the EUR/CHF pair since the end of March has been between 0.9265 and 0.913 and is currently trading again near the bottom of this range (the stronger side of the CHF).
