Daily Morning Briefing

NEWS FROM THE WEEK

Dollar rebounds from CPI low, bond yields extend drop after US super core inflation slowed to 5.1% yoy.In April. SOFR futures bump up Fed cuts to 80bp in 2H. Technical ‘death cross’ flags risk of deeper fall in UST 10y yield and IRS.Day ahead: UK GDP forecast MoM 0.1%. US Import and Export price index.US Treasury Secretary Yellen at G7: default would spark global downturn, risk undermining US global economic leadership and raise questions about our ability to defend our national security interests.China CPI slows to 0.1% yoy in April from 0.7% in March, core unchanged at 0.7%. PPI deflation accelerates to 3.6%% from 2.5%.Nikkei flat, Euro Stoxx futures +0.3%, EUR 10y IRS -2bp at 2.93%, Brent crude +1% at $77.2/b, Gold +0.2% at $2,031/oz.MARKET OVERVIEW

EUR/USD: 1.0928 – 1.0998 overnight range. Spot near 4-0week low as US CPI bounce unravels, implied vol lowest since Feb22. Support 1.0900, resistance 1.1130. Option expiry at 1.10 (€1.6bn). ECB speak and US jobless claims, PPI in focus for bond spreads.USD/JPY: 133.89 – 134.40 overnight range. Spot slips below 134 on 20bp compression in 2y UST/JGB spread post US CPI. Support 133.76, resistance 137.00. Option expiry at 134.00 ($910mn). The current account surplus widened a fraction to ¥2.278bn in March.GBP/USD: 1.2575 – 1.2641 overnight range. Cable slips on p/t before BoE. SG forecast +25bp to 4.50%, Dhingra and Tenreyro likely to repeat vote for no change. Signal of pause in statement could trigger deeper pullback. Support 1.2440, resistance 1.2670.AUD/USD: 0.6731 – 0.6796 overnight range. Spot retraces towards 200dma (0.6724) on broader dollar bounce. Australia and China trade ministers meet today, normalisation in trade could be boon for the currency. EUR/AUD battles deeper drop around 1.62.

OUTLOOK

Bond yields and swaps in the US and Europe stayed lower overnight after they fell yesterday in response to the decline in US super core inflation to the lowest level since July last year. Prices for core services ex-housing moderated to 5.1% yoy in April from 5.8% in March, the lowest since last July. Put differently, the pace of deceleration or second derivative more than doubled from 0.3ppt to 0.7ppt. This sends a reassuring message for the Fed that it can pause in June (as I have mention on my precious blog “FED will pause in June”.

Just four days ago, the situation was different as a remarkable increase in employment and an unexpected drop in the unemployment rate led to a surge in yields, sparking debates among investors about the possibility of a pause. However, yesterday, those doubts were completely dispelled. Despite some positive developments, there were also some less favourable aspects. The recent rise in rent, with an annual increase of 8.1%, and a significant 4.4% month-on-month jump in used-car prices indicate strong demand that is supporting prices. Even so, these factors did not prevent SOFR futures from adjusting the cumulative easing projection for the year-end, increasing it from 71bp to 80bp following the release of the data. Yields across the curve retreated, and the significance of this was emphasized by the hesitation of 2-year and 10-year cash yields near the 200-day moving average. Yields may experience further volatility in the short term as market sentiment oscillates in response to incoming data, compounded by concerns over the approaching debt ceiling in early June. From a technical perspective, the "death cross" phenomenon, where the 50-day moving average falls below the 200-day moving average, is still relevant for 10-year yields and swaps, suggesting potential further downside. The outcome after the release of the Producer Price Index (PPI) and weekly jobless claims today remains to be seen in the markets with ongoing momentum.

Corresponding with the decline in yields, the dollar naturally retraced its steps, putting a halt to profit-taking in EUR/USD. However, sellers have re-emerged this morning, disregarding hawkish comments made by ECB member Nagel at the G7 in Japan. The Bank of England's hypothetical 25bp rate hike today could potentially provide another boost to GBP/USD, if the bank does not signal a pause. Any resistance from Governor Bailey against market expectations of a peak at 4.75% or a lower inflation forecast in two years could dampen positive momentum for the pound.

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