April ended on a positive note with a strong rally in global bonds and a solid gain for US equities, supported by the earnings backdrop. Weaker than expected German inflation and GDP data and Euro area GDP data supported a chunky move lower in European yields. The breakdown of the US core PCE deflator showed some hopeful signs that services sector inflation was receding while the employment cost index showed a small upside surprise. The BoJ’s update was perceived as dovish, seeing a much weaker yen, while NZD and GBP outperformed Friday night.
There was a lot of news to digest on Friday, some of it market-moving. German CPI inflation and GDP figures were weaker than expected, with inflation falling to 7.6% y/y in April and flat growth in Q1, following the downwardly revised 0.5% contraction in Q4. Spain also saw a downside miss to CPI, while France saw an upside surprise. CPI inflation for the Euro area will be released tomorrow night, with the consensus picking a slight uptick in headline inflation to 7.0% and a slight downtick in core inflation to 5.6%. Like Germany, Euro area GDP growth was slightly weaker than expected at 0.1% q/q in Q1, following the downwardly revised 0.1% contraction in Q4, suggesting a weaker economy than thought but the region still managing to skirt recession.
The data saw pricing for the ECB meeting this week fall 3bps to +28bps, suggesting a slimmer chance of another 50bps hike, and a strong rally in European bonds ensued. Germany’s 2 and 10-year bonds fell in the order of 14-15bps, taking the latter down to 2.31%.
In the US, the key employment cost index was slightly stronger than expected at 1.2% y/y, with the annual increase falling slightly to 4.8% y/y, painting a picture of wage inflation remaining too strong for comfort. However, the market seemed to take more notice that the core PCE deflator came in as expected at 0.3% m/m, with the core services ex housing and energy services measure even lower at 0.2%, the weakest reading in eight months. A 25bps hike this week remains well priced, but Treasuries had a good day, with some influence by the strong rally in European bonds. The 2-year rate fell 6bps to just above 4%, while the 10-year rate fell 10bps to 3.42%.
The BoJ maintained its ultra-easy policy settings while removing its forward guidance on rates, which will allow more flexibility in future policy decisions. While at face value that looked like a move to a more policy neutral outlook, a formal long-term review of monetary policy will be done that will take 12-18 months. This dampened market expectations for a quick normalisation in policy, even though Governor Ueda said that policy could be changed, including a normalisation, during the review process. The market reaction of a 7bps fall in the 10-year rate to 0.39% and a chunky 1.7% depreciation of the yen on the day, suggested that the market read the announcement as dovish, not helped by Governor Ueda saying that the economy faced a bigger risk from premature tightening than from a delay.
Earlier in the day Tokyo CPI inflation, a leading indicator of the nationwide figure, continued to paint a picture of core inflationary pressure heading steadily higher, with the April reading (of the CPI ex fresh food and energy) coming in three-tenths ahead of consensus, at 3.8% y/y, a fresh forty-year high. This highlighted the strong inflationary backdrop in Japan, despite the BoJ’s inflation forecasts continuing to suggest it is only transitory, with projections that it will settle below 2% in coming years.
Most currencies showed small movements on Friday, but the NZD and GBP were the best performing, for no obvious reason, perhaps month-end flows were at play. The NZD rose 0.6% Friday night to end the week just over 0.6180, while the AUD was flat, lifting NZD/AUD to just under 0.9350. GBP rose 0.7% to over 1.2565, its highest level in just under a year. A flat euro saw NZD/EUR back above 0.56, while NZD/JPY was up over 2% for the day to 84.3.
The S&P500 rose 0.8% and the VIX index fell to an 18-month low of 15.8, supported by the better-than-expected earnings season to date. Banking sector worries earlier in the week were long forgotten, even as First Republic looked to become the next bank to fall over, and the market seemed unconcerned about the prospect of increasing banking sector regulation.
Global forces pushed domestic rates up on Friday, even with the market catching a late rally with the BoJ’s decision coming half an hour before the NZ close. Swaps were up 4-8bps, with the larger move coming at the 2-year point, closing at 5.05%. For NZGBs, demand was light considering it was month-end and the 10-year rate finished the day 3bps higher at 4.08%. Consumer confidence remained at a deeply depressed level and such poor readings no longer represent news to the market.
In data released Sunday, China manufacturing and non-manufacturing PMIs for April both fell by more than expected, taking the manufacturing gauge into contractionary territory at 49.2, with the non-manufacturing index at a still-robust 56.4. The data suggested some weaker economic momentum following the rebound in growth post the end of the zero-COVID policy.
The week ahead is a very busy one, with expected 25bps rate hikes from the Fed and ECB later in the week and the key US employment report at the end of the week. Tomorrow, the RBA is widely expected to pause again, but maintain a tightening bias. Other key global economic data include the US ISM manufacturing and services indices, and the JOLTS report. Domestically, the focus will be on Wednesday’s labour market reports, with the consensus expecting a small lift in the unemployment rate to 3.5% and high but steady quarterly wage inflation.
Tonight, the US ISM manufacturing index is expected to remain well in contractionary territory, even if the consensus expects a small uptick to 46.8. Many European markets and China start the week with a public holiday.
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