UK Q1 GDP data: Details aren’t really encouraging
|Markets
Monday’s big divergence between rising inflation expectations and declining real yields didn’t really persist yesterday. Both slightly increased leaving US yields 0.5 bps (2-yr) to 2 bps (30-yr) higher on the day. The US Treasury kicked off its mid-month refinancing operation with a $58bn 3-yr Note auction. It tailed slightly with an average bid cover. The proof of the pudding is in the longer term debt sales occurring tonight ( $41bn 10-yr Note) and tomorrow ($27bn 30-yr Bond). We fear investors won’t have wiped out the recent inflation scare, risking a vicious circle of higher long term US yields. We stressed before that the downside (1.53%) became better protected after the failed attempt lower following dismal US payrolls. Another observation in that core bonds and stocks sold off in lockstep recently, defying the tradition safe haven bid. Main European indices lost nearly 2% yesterday while the German yield curve bear steepened. German yields ended 2 bps (2-yr) to 5.1 bps (30-yr) higher on the day. 10-yr yield spread changes vs Germany ended flat. The Dow Jones – recent outperformer – shed 1.37% while the S&P yielded 0.87%. The Nasdaq ended flat following a very bad start. This morning’s Asian market action suggests that the worst isn’t over yet. Apart from China, most regional indices lose 1% plus with Taiwan (-4%) notable underperformer.
Dollar markets kept their cool so far this week with deteriorating risk sentiment and underlying yield dynamics cancelling each other out. The greenback is even better bid in today’s early price action with DXY setting a minor week high at 90.40 while EUR/USD dips to 1.2115. It will remain a balancing act today with stock market still looking vulnerable, but US April CPI inflation expected to surge towards (near) multiyear highs: 3.6% Y/Y for the headline outcome and 2.3% Y/Y for the core reading. Fed governors in the meantime remain stoic with Brainard saying that (higher inflation) will sort itself out as the economy returns to normal. EC spring forecasts are a wildcard for trading and could be delivering a more optimistic underlying message.
Sterling’s political relief rally brought the UK currency at first resistance against the euro (EUR/GBP 0.8589). The fragile risk sentiment helped prevent a break lower so far, which would bring the EUR/GBP 0.8472 YTD low back on the radar. UK trade minister Frost warned that the brexit deal for Northern Ireland won’t be sustainable for long in its current form. For now, it isn’t on investors’ minds yet. UK Q1 GDP data showed a 1.5% Q/Q setback which was slightly smaller than feared. Details aren’t really encouraging though with consumption dropping by 3.9% Q/Q (-1.8% Q/Q expected), investments shedding 2.3% (vs -0.8% Q/Q) and exports dipping 7.5% Q/Q (vs -7.3% Q/Q). A positive contribution from government spending (2.6% Q/Q) and an even bigger blow to imports (-11.9% Q/Q) prevented a worse headline outcome.
News headlines
The US took further measures for fuel to be transported to the East Coast after the country’s largest pipeline operator Colonial Pipeline Company was targeted by a ransomware attack. The White House will loosen environmental rules by allowing foreign tankers to ferry fuel between ports for the first time in a century. 1000+ stations in the Southeast reported running out of gasoline. Colonial said it will know late Wednesday whether it is able to restart.
Israel stepped up its attacks on the Gaza Strip overnight in what is seen as the worst escalation since 2014. Hamas-ruled Gaza already responded this morning. The UN warns for an all-out war and said it would hold a second emergency session on today seeking to de-escalate the situation. The current flareup are intensified spillovers from clashes between Israeli security forces and Palestinians in the contested city of Jerusalem over the past few weeks.
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