Markets
Today the markets witnessed a kind of “temporary session” with little significant data and no “new news” about the conflict in the Middle East. US President Trump reiterated that they are in the “final throes of what will be a very good agreement” and that this could become tangible in the coming days. However, it is understood that the markets are currently taking a wait-and-see approach, with technical trading dominating today’s price action. Both private sector payrolls ADP (average weekly change over the four weeks to May 23 at 29K) and US trade balance data (trade deficit at $55.9B; with both imports and exports modestly higher) did not bring any market-moving news. US small business confidence eroded further (95.3 from 95.9, the weakest level since September 2024). US bond yields are falling 2-3 basis points across the curve. Oil’s return near its recent lows (Brent at $92) may be a small supportive factor for US bonds. However, May US CPI data (expected at 0.5% mo/4.2% core and 0.3% mo/2.9% core) will likely be the most important factor guiding short-term momentum in US interest rate markets. In a similar technical trade, German yields show a similar pattern (2p-3bp; 30p-0.5bp). A 25 basis point rate hike at Thursday’s ECB meeting has been completely ruled out. In the current environment, one can expect the ECB to remain cautious about providing any guidance on the (pace of) additional steps. However, markets will be keen to hear any hints/assessment on the bank’s reaction regarding successive interest rate hikes if necessary. Stock markets entered a calmer mood today with the EuroStoxx 50 index regaining 1%. US indices, including the Nasdaq, opened in green again. However, the likes of the NASDAQ (+1%) and the S&P 500 (today +0.8%) still have a long way to go to erase the recent “losses/corrections”. In this regard, we are also closely monitoring the reaction of stock markets in the event of higher/higher than expected US inflation data. In the forex market, the dollar continues to take a step back after testing/approaching some of the first resistance levels. For the DXY TW indicator, the 100.21/64 area (yesterday’s high/YTD high) currently looks one step too far/high. EUR/USD also shows a return of resilience to the 1.1575 area after testing the 1.15 area yesterday. However, we also remain cautious ahead of the US CPI data release tomorrow. USD/JPY remains paralyzed near the 160 level. Given the relative weakness of the USD globally on the day, this is not a convincing signal for the yen.
News and opinions
Hungary’s sub-par inflation has paved the way for a near-term interest rate cut (possibly in June) by the central bank. Headline prices stagnated month-on-month in May, allowing the annual figure to slow from 2.1 to 1.8%. This defies expectations for the interest rate to accelerate to 2.2% and below the lower end of the Hungarian Central Bank’s tolerance range of 3% +/-1 ppt. Core inflation fell by -0.02% on a monthly basis and to 1.94% on a yearly basis. Among the categories mentioned by the Hungarian Central Statistical Office, food prices fell by 0.3% on a monthly basis. The prices of electricity, gas and other fuels also decreased by 0.8%. This was offset by an increase in the prices of services by 0.2% and of clothing and shoes by 0.8%. Hungarian financial markets have been pricing in interest rate cuts by the central bank for some time now amid a series of CPI prints that fell short of consensus. However, Hungarian swap yields fall by about 10 basis points across the curve. The forint implicitly agrees to such a move by the central bank by maintaining its flexibility over the past two weeks. The EUR/HUF pair is currently trading at 355.3, which is among the strongest Hungarian forint levels in more than four years.
The Bank of Japan will discuss at its June meeting a halt to its quarterly cuts to its bond-buying program from fiscal year 2027 (which starts in April) onwards, Japanese newspaper Nikkei reported. Sources told the media something similar, although they added that the decision would be split between those who want to focus on calming investors’ nerves and others who find it necessary to continue the tapering process to reduce the Bank of Japan’s large balance sheet. The Bank of Japan has been reducing its bond holdings since 2024 under Governor Ueda and is reducing the pace of monthly purchases by 200 billion yen each quarter. The current buying pace of JPY 2.1 trillion already allows for a natural run-off (about JPY 50 trillion annually) due to the huge amount of bonds outstanding from the bloated portfolio. This provides the Bank of Japan with an opportunity to temporarily stop tapering bond purchases, sources say, adding that the central bank could keep the current pace of purchasing open. Aside from the balance sheet discussion, the Bank of Japan is certain to raise interest rates to 1% next week. Market prices in another step by the end of the year.
