Central banks noted that high uncertainty hinders short-term decisions
Markets
Today’s thin eco calendar gives the opportunity to reflect on the past week’s events. First and foremost, the Fed extended its policy rate pause and indicated that the needle in the compass remains pointed at (upside) inflation (risks). The message kicked in yesterday with US yields rising by 7.5 bps (30-yr) to 12.1 bps (5-yr), the belly underperforming the wings. A weak $25bn 30-yr Bond auction contrasted with solid sales of 3-yr and 10-yr Treasuries earlier this week, but didn’t trigger any additional “panic” sales. The likes of Fed Barr, Kugler, Williams, Barkin, Goolsbee and Waller might elaborate on the decision and the Fed’s reaction function in scheduled speeches later today. The sell-off in US T’s also contrasted with the better performance of US equities and the dollar. Both profited from positive trade vibes, coming from the UK-US trade deal (“not a template”), but especially from US President Trump comments suggesting that tariffs against China could be lowered if talks go well. US Treasury Secretary Bessent and trade negotiator Greer meet with Chinese meet with Chinese vice premier He Lifeng in Geneva this weekend in first high-level talks since the trade escalation. The fentanyl issue serves as the icebreaker. Main US equity gauges rallied by up to 1% for Nasdaq. EUR/USD lost first support at 1.1274/76, providing room for a temporary return towards the 1.10-area. Medium-term, we stick to our view that the pair is in a technical buy-the-dip pattern. Monetary policy decisions in Sweden & Norway (status quo) and the Czech Republic & the UK (hawkish 25 bps rate cuts) are another reflection point. Central banks clearly stated that the huge amount of uncertainty actually numbs the short term decision making process. They align with the Powell view that it takes more data to see which risks to the growth and inflation outlook effectively materialize. In the case of the UK and the BoE, the MPC clearly downplayed the doom and gloom scenarios that some investors currently take into account. The UK Gilt curve bear flattened yesterday with yield rising by 6.5 bps (30-yr) to 12.4 bps (2-yr) as the BoE remains on a gradual (quarterly) rate cutting pace. EUR/GBP tested first support at 0.8474 and closed just above that handle. BoE governor Bailey and BoE chief economist Pill will today elaborate on the decision making process. Yesterday’s central bank outcomes put aggressive market pricing on future ECB policy, both from a timing and from a structural perspective, into doubt but didn’t trigger a real momentum change. Daily changes on the German curve varied between +5 and +6 bps yesterday.
News and views
Chinese exports (USD terms) in April rose 8.1% y/y, way more than the 2% expected. April was the first month capturing the effects of the disruptive import tariffs announced on Liberation Day (April 2). That explains the low consensus bar. Chinese exports to the US indeed slumped around 20% but were compensated by a similar-sized increase to other Asian nations and by an 8% uptick to the EU. It’s expected that this rerouting will pick up in the coming months as well. Chinese imports from the US dropped by 14%, a consequence of the retaliatory Chinese import tariffs. Total imports fell 0.2% y/y compared to the -6% expected. China’s yuan weakens today in a move that already took place ahead of the data. USD/CNY rises for a third day straight to the 7.25 area, erasing a large part of the losses in the wake of the PBOC’s significantly lower fixing on Tuesday.
The Polish zloty yesterday appreciated towards EUR/PLN 4.25 from 4.27 after National Bank of Poland governor Glapinski explained Wednesday’s 50 bps rate cut in more detail. He said inflation has peaked and an improved CPI outlook allowed for some easing. But Glapinski warned the fight isn’t won yet and said the first rate cut since end 2023 doesn’t mean the start of a cycle. The central bank is now back at wait-and-see, he said, adding that future policy moves hinge on the July projection. Were the NBP to cut further, the governor suggested it would be by 25 bps rather than the 50 bps they did earlier this week. MPC member Kotecki in some comments this morning favours a total of 100 bps this year with a follow-up move preferably in September. Wnorowski weighed in as well, with July seen as the earliest possible occasion for another, normal-sized cut.
Author
KBC Market Research Desk
KBC Bank
