Higher-than-expected US inflation readings reinforced the debate whether or not current price rises will be as temporary as most central bankers flagged of late. Financial inflation indicators including the 10-y US breakeven inflation (2.54%) jumped to multi-year peak levels after Wednesday’s shocking US CPI release. Even so, the ‘inflation panic’ gradually eased on Thursday and on Friday. Investors pondered how much inflation risk is already discounted. At the same time, US activity data came in mixed to slightly softer than expected with US retail sales growth (headline 0.0% from 9.8% in March versus 1.0% expected) taking a breather after a stimulus-driven jump. Michigan consumer confidence unexpectedly dropped from 88.3 to 82.8 while a further modest rise was expected. The commodity rally (including the likes of copper) ran into resistance and helped ease the inflationary narrative. Break-even inflation stabilized at a high level and with real yields under modest pressure. US nominal yields showed signs of a topping pattern. The US yield curve bull flattened Friday with yields 0.6 bps (2-y) and 5.5 bps (30-y) lower. German yields shed less than 1 bp. The 10-y yield (-0.13%) holds above key resistance/range top at -0.15%/-0.14%. The 10-y EMU swap rate (0.15%) shows a similar picture. The easing of the inflation panic inspired investors to return to equity buying with US indices gaining between 1% (Dow) and 2.32% (Nasdaq). European indices on average gained 1.5%/2.0%. Inflation uncertainty initially supported a modest USD safe have bid mid-last week, but the US currency ceded ground on Friday as real yields declined and global risk sentiment improved. EUR/USD returned north of 1.21 (close 1.2141). DXY dropped to the 90.30 area. Key USD support at EUR/USD 1.2182/DXY 90.00 wasn’t challenged. Sterling didn’t show a clear directional trend with EUR/GBP holding near the 0.86 pivot.
Asian equities only partially join Friday’s rally on WS with Japan underperforming and China outperforming despite softer than expected eco data (cf infra). The dollar stabilizes (DXY 90.40, EUR/USD 1.2127) and so does the yuan (USD/CNY 6.4375). Today’s eco calendar is light with US Empire manufacturing index and the NAHB housing index. They won’t change the broader picture. The Minutes of the previous Fed meeting (Wednesday) will be scrutinized as investors check the Fed’s conviction regarding the temporary nature of current inflation spike. EMU May preliminary PMI’s will be published on Friday. The US 10-y yield is still in a consolidation pattern between 1.53 and 1.77%. In Europe, we look out whether the break of the -0.15% level for the 10-y German yields will be confirmed. The dollar struggles, but at least for now, a clear resumption of the downtrend doesn’t materialize. A more cautious risk sentiment might buy some time for the US currency in a daily/ST perspective.
Chinese April eco data slightly disappointed this morning, losing some momentum as the second quarter starts. Higher comparison bases compared to March generally affected the yearly number. Retail sales slowed from 34.2% Y/Y to 17.7% Y/Y. Details showed only a 0.3% rise in monthly terms with especially spending on consumer staples and autos slowing. Industrial production rose by 9.8% Y/Y, down from 14.1% Y/Y in April. Production of metal products, medicine, and general purpose equipment remained the main drivers. Investment growth slowed from 25.6% YTD YoY to 19.9% with government support still a key helping hand.
Edwin Poots has been elected as new party leader of Northern Ireland’s Democratic Unionist Party. He is considered a party hardliner who strongly opposes the current Norther Ireland Protocol which creates a border in the Irish Sea. UK EU Minister Frost also warned twice last week to rapidly rethink the Norther Ireland trade rules. He will meet with EC VP Sefcovic next week. Poots and Frost hope to get some progress by July 12 when annual pro-UK unionist parades are held in Northern Ireland. They fear a new flaring up of violence in the streets witnessed last month.