Markets Today: German inflation concerns, but equity markets refuse to freak out

Brent oil recorded its 8-consecutive day of price increases, supported by expectations of a China reopening in addition to the expected EU Russian oil ban.

By

Todays podcast

Overview All Mixed Up

  • EU equities start the new week with a positive tone
  • US eq futures edge higher on Memorial Day
  • German inflation prints well above expectations, increasing ECB hiking expectations
  • Brent oil climbs above $121 as Shanghai looks to reopen
  • Fed Waller supports 50bps hikes over several meetings
  • 10y Bund yields jump 9.4bps to 1.05%
  • US Treasury futures fall, implying a 10y UST yield above 2.80%
  • EU still struggling to find agreement on Russian oil ban
  • USD extends decline with commodity linked FX leading the charge
  • Coming up: AU GDP partials, China PMIs, EZ CPI, Chicago PMI, Conf. Board Consumer Confidence

All mixed up you don’t know what to do -311

European equities start the new week with a positive tone while US equity futures eke out small gains on Memorial Day. Inflation concerns lift core global bond yields as German inflation prints a new record high and oil prices extend recent gains, US Treasury futures fall implying a 10y UST yield above 2.80%. USD extends decline with commodity linked FX leading the charge, AUD trades to an overnight high of 0.72 and now trades just below the figure.

After opening higher, European equities managed to close on the green led by gains in consumer discretionary (+1.96%) and IT sectors (1.5%). European banks also traded with a positive tone after global regulators agreed to start treating the euro area as one market in determining capital requirements for its top lenders (regional banks closed 1.47% higher). The Stoxx 600 index ended day +0.59%, its fourth consecutive day of positive returns. US equities futures followed a similar pattern to European equities, eking out small gains on Memorial Day. The S&P 500 mini closed 0.52% higher while the NASDAQ 100 mini was 1.043%.

Equities showed little concern to rising inflationary pressures. Germany recorded another record high inflation print at 8.7%yoy, surpassing expectations for the headline reading to climb from 7.8% to 8.1%. Energy and food were the main culprit for the larger than expected increase in prices, amping the pressure on the ECB to remove its ultra-easy monetary policy. The Bank meets on June 9, next week Thursday, with the market widely expecting an end to the Bank’s QE programme, the big question is how quickly the Governing Council decides to move away from its negative deposit rate policy (by 25bps or 50bps hikes) and how high it will go before looking to pause. Tonight, we get the Eurozone CPI reading (more below) and after the stronger than expected German inflation numbers, money markets have increased ECB rate hike expectations by 4 bps to 114bps by the end of the year with the deposit rate seen at + 0.557% by the mid December ECB meeting.

Overnight, German Finance Minister Lindner called the fight against inflation his top priority and he reiterated government plans to restore constitutional limits on net borrowing from next year, suggesting that the 2023 finance plan will be “fundamentally different” to recent budgets.

Meanwhile in Brussels, the European Commission is still struggling to find an agreement over a proposed ban on Russian oil imports . The two-day summit still has another day to go and expectations are for a water-down agreement to be reached, although Hungary is still opposing the move. The rising cost of living is making it difficult for EU countries to agree on a ban, a Russian oil ban inevitably implies a cost for EU countries with Russia retaliation also a concern.

European rates surged higher as the state-by-state German inflation data were released, seeing Germany’s 2-year rate up 11bps on the day to 0.43% and the 10-year rate up 9bps to 1.05%. Other European rates show similar increases. The UST market was closed overnight as the US commemorates Memorial Day, but UST Futures traded during the European session with the decline in price implying a move in 10y UST yields above 2.80%.

Sticking with the inflation dynamics, Fed Governor Waller was speaking overnight and true to his hawkish form he said that he supported more 50bps hikes “for several meetings” and not taking these off the table until “I see inflation coming down closer to our 2% target”. He supported a policy rate above neutral by the end of this year, and he said his plan for hikes was roughly in line with market pricing, which sees the Fed Funds rate at about 2.75% in December.

Oil prices have extended their recent rise, with Brent oil recording its 8-consecutive day of price increases, up 1.9% over the past 24 hours to $121.67 . In addition to the expected EU Russian oil ban, oil prices have been supported by expectations of a China reopening. China reported the fewest new Covid-19 cases in almost three months, only 122 cases were reported across the country on Sunday, the fewest since March 3. The decline in cases supports the authorities’ intentions to relax some of the restriction imposed, specially in Shanghai and Beijing. Tomorrow, Shanghai will lift lockdown measures for residents in low-risk areas, allowing them to leave and enter their compounds freely with bus and subway services scheduled to reopen in an orderly manner. Good news, but China’s reopening strategy is only gradual and still very much susceptible to a new virus outbreak. Omicron is very infectious and until China finds a solution to it vaccine dilemma, the risk of new lockdowns will remain elevated.

Moving onto currencies, the USD has extended its decline, down for a third day in a row (~0.31%) in both BBDXY and DXY measures .  Commodity linked currencies have been the outperformers over the past 24 hours with NOK at the top of the leader board, +0.74% with the AUD extending its gains overnight (0.5%), briefly trading at 72c before easing a few pips, the aussie now trades at 0.7196. The NZD has pushed up to about 0.6560, up 0.4% from Friday’s close, but not much progress from yesterday’s NZ close, now at 0.6554. The strong German CPI data helped fuel further gains in the euro, the union currency gained 0.5% from last week’s close and now trades at to 1.0779, while the risk-on backdrop with higher global rates has seen JPY the weakest performer, with USD/JPY up 0.3% to 127.60.

Coming Up

  • This morning Japan gets Industrial production and jobless rate, New Zealand publishes building permits and its business confidence reading for May. Australia gets building approvals, Private sector credit alongside several GDP partials (balance of payments, business indicators survey, and government finance statistics) ahead of the Q1 GDP release tomorrow.
  • AU Building approvals is expected to show an ongoing modest trend decline in detached house. The volatile apartment series has been driving the monthly growth numbers recently. We pencil in a 2.0% m/m gain on the back of a bounce back in monthly attached approvals.
  • AU Private Sector Credit is also likely to show ongoing moderation. We see the monthly growth rate stable at 0.4% m/m as owner occupier housing continues to moderate at the margin, but some rebound is seen from softness in the March numbers for business growth.
  • As for the AU GDP partials there are a few themes worth noting:
    • The current account surplus is expected to widen a little from $12.8bn to $13.5bn on the back of strong export values. Strength in export values through the first quarter, however, was largely a prices affair, with a sizeable decline in net export volumes expected.
    • The business indicators’ survey contains a read on corporate profits, the private sector wage bill, inventories, and real total sales. A strong outcome for inventories has the potential to sure up GDP growth in the quarter.
  • All that being said, China’s official PMIs for May are the data release to watch during our time zone (out 11:30am Sydney time). After the sharp declines recorded in April, the market is looking for a small improvement, although both the manufacturing (49 exp. vs 47.4 prev.) and non-manufacturing (45 exp. vs 41.9 pev.) readings are expected to remain in contractionary mode.
  • Later today, France (5.8% yoy exp. vs 5.4% prev.) and Italy get their CPI readings for May ahead of the Eurozone reading a few hours later (headline 7.8% exp. vs 7.5% prev., Core 3.6%yoy exp. vs 3.5% prev.)
  • The Chicago PMI (54.5 exp. vs 56.4 prev.)  and Conf. Board Consumer Confidence (9 exp vs 107.3 prev.) are the US data releases to watch and Canada publishes its Q1 GDP numbers with the market looking for a 5.5%qoq annualised print vs 6.7% prev.
  • ECB Villeroy, Visco and Makhlouf are on speaking duties.

Market Prices

 

Read our NAB Markets Research disclaimer. For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets