OVERNIGHT NEWS
# Risk markets, dollar and bond yields settle down after wild week, S&P fights back from 3,858 low. Shanghai aims to stop community spread and ease Covid restrictions by 20th May. Banxico delivered hawkish 50bp rate increase last night.
# Fed chair Powell in radio interview admits bank is behind the curve on policy tightening, reiterates preference for 50bp hikes in next two meetings, prepared to do more. Warns Fed ability to control inflation without triggering recession may depend on factors outside its control.
# Weekly FX changes: NOK, AUD and NZD battered in G10, JPY rebounds on lower US yields, safe haven. RUB +5%, TRY -3%.
# Day ahead: ECB speakers Centeno and Nagel, Fed’s Kashkari and Mester, Michigan consumer sentiment, Russia CPI.
# Nikkei +2.6%, EUR 10y IRS +4bp at 1.69%, Brent crude +1.2% at $108.8/b, Gold -0.1% at $1,823/oz
Respite at last for European and US rates this week
Change of pace
By Rui Ding
After what has been a whirlwind week, the pace of market moves has slowed down and risk sentiment trades slightly better. Fed Chair Powell spoke after the NY close, suggesting that they are not actively considering 75bps but that it was still a possibility down the road. Mester will sound more hawkish than Kashkari in separate appearances later today, while we interpret Daly’s comments on tighter financial conditions as hawkish. Citi Economics sees upside risks to Michigan medium term inflation expectations in the preliminary May report due at 10:00 EDT.
Covid headlines were not the only focus for China. Comments carried by state media suggested that the pace of depreciation was being noticed, but a huge miss in China new yuan loans credit data capped CNH gains. The weekend will bring news on the Beijing Covid situation, while we do not expect a MLF rate cut on Monday. On the other hand, CZK continues to secure gains after CNB intervention on Thursday and MXN benefits from a more hawkish Banxico. After the price action of this week, watch the weekly close for technical signals on US equities, USDJPY and US yields.
Latin America:
Latam currencies ended the session stronger, supported by higher commodity prices, as local headlines remained somewhat muted. CLP was the region’s top performer, appreciating ~0.6%, followed by MXN, which ended the session ~0.4% stronger. In contrast, COP remained under pressure (~0.3% weaker) despite higher oil prices, as markets continued to price in more risk premia around the presidential election at the end of the month. BRL closed relatively flat, as local headlines highlighted former President Lula’s comments on rescinding the country’s spending cap if he wins the upcoming presidential election. The price action in local rates was mixed, with rallies across the CLPxCAM curve and in the long end of the TIIE curve. DI rates continued to underperform, as the April inflation print in Brazil surprised to the upside; January 2024 DIs closed 19bp higher, at 13.05%. COPxIBR rates continued to underperform, in line with the currency, likely driven by the same catalyst (rising concern about a potential unorthodox policy shift following the upcoming election). 10y IBR closed 6bp higher, at 9.02%.