Some ECB members dial back aggressive rate hike expectations

Notes/Observations

- Central Bank continue to step up the fight against inflation (RBNZ again raised by 50bps).

- Several ECB members (Rehn, Panetta) stressed that the pace of normalizing its accommodative policy would be gradual; dial back aggressive hikes applying nuanced tones to the path and state of the economy.

- Bond yield retreat as growth fears intensify.

- Focus on upcoming release of Fed May Minutes.

- Following on from a mostly higher Asia session, Europe holds onto modest gains between 0-0.5% and US futures erased earlier gains to be remain flat. Metals and bond yields are down, oil and the DXY are up.

- Germany consumer confidence slightly beat and Q1 final GDP matched prelim. Nearly all other data from PPI, unemployment and consumer confidence came in lower than estimates across European countries.

- Global tensions remain on an escalatory trajectory as press reports indicate that the US and Japan will conduct joint military jet exercises and South Korea warns of North Korea testing nukes soon.

- Hotly anticipated Sue Gray report in the UK is expected with the focus on determining if PM Johnson misled parliament, a resign able act.

Asia

- RBNZ again raised the Official Cash Rate by another 50bps to 2.00% (as expected) and raised its rate path outlook. Forecasted further aggressive hikes to come to tame inflation.

- RBA Assist Gov Ellis (chief economist) stated that there would be additional rate hikes from here but could not say where rates will peak.

- Japan Cabinet Office (Govt) May Economic Report maintained its overall economic assessment that the domestic economy was showing signs of picking up.

- South Korea confirmed North Korea fired both an ICBM and a short range missile; Second missile that was fired exploded in mid-air (Note: US President Biden ended his trip to Asia on Tuesday (May 24th).

- South Korea National Security Adviser Kim: sees possibility of North Korea nuke test and is closely monitoring, sees 'little chance' of nuclear test within 1-2 days.

Ukraine conflict

- US Treasury confirmed it let general license that had allowed Russia to pay US bondholders to expire at 00:01 ET on Weds (May 25th). Ending a waiver allowing US bondholders to accept Russian debt payments.

- EU Commission President Von der Leyen confirmed that she did not expect to see a Russia oil ban decision reached at the EU summit on May 30-31st.

Europe

- British employers increased pay for their staff by 4% on average in the three months to April (biggest raise since 1992). Article noted that raise was way behind pace of inflation.

Energy

- Weekly API Crude Oil Inventories: +0.6M v -2.4M prior; Large draw in gasoline inventories.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 +0.34% at 433.04, FTSE +0.30% at 7,506.70, DAX +0.12% at 13,936.90, CAC-40 +0.10% at 6,259.10, IBEX-35 +0.47% at 8,671.65, FTSE MIB +0.44% at 23,981.00, SMI % at #, S&P 500 Futures +0.04%].

Market Focal Points/Key Themes: European indices open higher across the board, but retraced some of the gains as the session progressed; leading sectors include telecom and financials; laggard sectors include technology and consumer discretionary; Sweden closed for holiday; TotalEnergies acquires 50% in Clearway; Aareal Bank taken over by Altantic; focus on series of speeches by word leaders at Davos; earnings expected during the upcoming US session include Nvidia and Dick’s Sporting Goods.

Equities

- Consumer discretionary: Marks & Spencer [MKS.UK] +0.5% (earnings; exits Russia), Pets at Home [PETS.UK] +8% (earnings; buyback), Ocado [OCDO.UK] -4% (trading update; cut outlook), Intertek Group [ITRK.UK] -1% (trading update).

- Financials: Morses Club [MCL.UK] -22% (delays results).

- Utilities: SSE [SSE.UK] +5% (earnings).

Speakers

- ECB’s Panetta (Italy, dove) stated that the outlook justified a gradually exiting of negative rates and did not mean removing stimulus outright. Need to avoid the risk of 'Normalization Tantrum'. ECB should remain data driven. Signs of economic stress were emerging in the hard data and would be unwise for us to pre-commit.

- ECB’s Rehn (Finland) stated that it should raise rates by 25bps in July and raise to zero in autumn. Policy normalization to be gradual.

- ECB’s de Guindos (Spain, neutral): ECB had not discussed anti-fragmentation tool in detail.

- ECB Financial Stability Review saw the risk of sharp corrections in asset markets if the economic outlook deteriorated as a result of Ukraine war or inflation turned out to be much higher than expected. Warned of corporate weakness amid inflation and slower growth.

- EU Economic Commissioner Gentiloni (Italy) stated that was working on an agreement on a Russian oil embargo; hopeful one would emerge in the coming days. Windfall tax for companies is one possible tool. Still possible to avoid a recession in region; needed good monetary and fiscal policy.

- Ukraine President Zelenskiy stated at a Davos tele-conference that all talks with Russia had stalled. Talks hinge with Putin's acceptance of Ukraine reality and Ukraine sought a return of all its territories.

- Russia reportedly could allow corridor for Ukraine ships with food; Insists Ukraine must demine ports for grain ship corridor.

- IAEA stated that Iran was increasing its nuclear capabilities.

Currencies/fixed income

- USD trying to regain some composure after a recent string of daily losses. Focus on Fed minutes due out later today.

- EUR/USD was lower and below the 1.0675 level by mid-session after several ECB members dialed back expectations of aggressive rate hikes by the central bank. The ECB Financial Stability Review also painted concerns of the slower growth outlook and corporate earnings front.

- GBP/USD - trades flat between 1.251-1.256 range.

- EUR/USD - pivots down between towards 1.670 level.

- AUD/USD - declines to 0.708.

- NZD/USD - erased some gains after RBNZ cash rate hike, trades at level 0.6475.

- USD/CAD - climbs slightly to 1.284 level.

- USD/CHF - higher slightly at 0.962.

- USD/JPY - higher slightly to 127.0.

Economic data

- (DE) Germany Q1 Final GDP Q/Q: 0.2% v 0.2% prelim; Y/Y: 3.8% v 3.7% prelim; GDP NSA (unadj) Y/Y: 4.0% v 4.0% prelim (**Note: avoids a technical recession).

- (DE) Germany Q1 Private Consumption Q/Q: -0.1% v +0.2%e; Government Spending Q/Q: 0.1% v 1.0%e; Capital Investment Q/Q: 2.7% v 1.5%e.

- 02:00 (DE) Germany June GFK Consumer Confidence: -26.0 v -25.5e (6th straight negative reading).

- 02:00 (SE) Sweden Apr Unemployment Rate: 8.2% v 8.2% prior; Unemployment Rate (seasonally adj): 7.7% v 7.5%e; Trend Unemployment Rate:7.6 % v 7.6% prior.

- (SE) Sweden Apr PPI M/M: 1.2% v 5.5% prior; Y/Y: 23.8% v 24.5% prior.

- (NO) Norway Mar AKU Unemployment Rate: 2.9% v 3.1% prior.

- (FR) France May Consumer Confidence: 86 v 89e.

- (ES) Spain Apr PPI M/M: 1.6% v 6.7% prior; Y/Y: 45.0% v 47.0% prior.

- (SE) Sweden May Consumer Confidence: 70.4 v 74.5 prior; Manufacturing Confidence: 125.5 v 121.3 prior; Economic Tendency Survey: 110.5 v 108.0e.

- (CH) Swiss May Expectations Survey: -52.6 v -51.6 prior.

- (PL) Poland Apr Unemployment Rate: 5.2% v 5.3%e.

- (PL) Poland Q1 Unemployment Rate: 3.1% v 3.0%e.

- (PL) Poland May Consumer Confidence: -38.4 v -36.0e.

Fixed income issuance

- (FR) France Debt Agency (AFT) opened its book to sell EUR-denominated 15-year inflation-linked green bond (Oatei) via syndicate; guidance seen +15bps to July 2036 Oatei.

- (FI) Finland opened its book to sell EUR-denominated 10-year RFGB bonds via syndicate; guidance seen -13bps to mid-swaps.

- (IN) India sold total INR330B vs. INR330B indicated in 3-month, 6-month and 12-month bills.

- (NO) Norway sold NOK2.0B vs. NOK2.0B indicated in 2.125% May 2032 Bonds; Avg Yield: 2.70% v 2.71% prior; bid-to-cover: 3.47x v 2.44x prior.

Looking ahead

- (CO) Colombia Apr Retail Confidence: No est v 35.5 prior; Industrial Confidence: No est v 13.6 prior.

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (DE) Germany to sell €2.0B in 1.0% May 2038 Bunds.

- 05:30 (GR) Greece Debt Agency (PDMA) to sell €625M in 26-week Bills.

- 05:30 (EU) ECB allotment in 3-month LTRO tender (prior €57.5M with 5 bids recd).

- 05:30 (HU) Hungary Debt Agency (AKK) switch auction.

- 06:00 (CZ) Czech Republic to sell combined CZK12.0B in 2024, 2026 and 2035 bonds.

- 06:45 (US) Daily Libor Fixing.

- 07:00 (US) MBA Mortgage Applications w/e May 20th: No est v -11.0% prior.

- 07:00 (MX) Mexico Q1 Final GDP Q/Q: 1.0%e v 0.9% prelim; Y/Y: 1.7%e v 1.6% prelim; Nominal GDP Y/Y: No est v 9.0% prior.

- 07:00 (MX) Mexico Mar IGAE Economic Activity Index (Monthly GDP) M/M: 0.4%e v 0.0% prior; Y/Y: 0.9%e v 2.5% prior.

- 07:00 (MX) Mexico Apr Trade Balance: $0.5Be v $0.2B prior.

- 07:00 (BR) Brazil May FGV Consumer Confidence: No est v 78.6 prior.

- 07:05 (JP) BOJ Gov Kuroda at conference.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:30 (US) Apr Preliminary Durable Goods Orders :0.6%e v 1.1% prior; Durables (ex-transportation): 0.5%e v 1.4% prior; Capital Goods Orders (non-defense/ex-aircraft): 0.5%e v 1.3% prior; Capital Goods Shipments (non-defense/ex-aircraft: 0.5%e v 0.4% prior.

- 10:00 (MX) Mexico Q1 Current Account Balance: -$2.2Be v $3.0B prior.

- 10:30 (US) Weekly DOE Oil Inventories.

- 12:00 (RU) Russia Apr PPI M/M: 2.7%e v 5.9% prior; Y/Y: 26.9%e v 26.7% prior.

- 12:00 (CA) Canada to sell 10-year notes.

- 13:00 (US) Treasury to sell 2-Year FRN Reopening.

- 13:30 (BR) Brazil Apr Total Federal Debt (BRL): No est v 5.57T prior.

- 14:00 (US) FOMC May Meeting Minutes.

- 17:10 (NZ) New Zealand Central Bank (RBNZ) Gov Orr in Parliament.

- 19:50 (JP) Japan Apr PPI Services Y/Y: 1.5%e v 1.3% prior.

- 21:00 (KR) Bank of Korea (BOK) Interest Rate Decision: Expected to raise 7-Day Repo Rate by 25bps to 1.75%.

- 21:30 (AU) Australia Q1 Private Capital Expenditure: 1.35e v 1.1% prior.

- 23:35 (JP) Japan to sell 40-Year JGB Bonds.