Focus on US CPI

Market movers today

On the data front, the most important release of the day will be the US April CPI. While base effects will continue to distort the US inflation figures higher on a y/y basis, markets will focus on any signs of faster underlying inflation pressure. April inflation is due for release also in Sweden, and we will get the March industrial production figures for the Euro Area.

The EU Commission will release its spring economic forecast update, where the focus will be on the updated fiscal projections and any preliminary assessments of the countries recovery plans submitted at the end of April.

Finally, we will have a range of Fed speakers on the wires in the evening.

The 60 second overview

Inflation: Markets are heavily debating the inflation impulse in coming months with yesterday's price action of lower stocks, higher nominal yields, and higher inflation market pricing at the centre heading into today's US CPI figure. While little doubt is cast about a surge in inflation this year, the effect on US monetary policy and if it could lead the Fed into tightening earlier than currently guided is discussed. Fed's Brainard said yesterday that continued patience must be shown. Both in the US and the euro area, inflation expectations are on the rise in recent trading sessions, with US 5y5y at 2.55% and Euro crossing at 1.60% yesterday. Asian markets are also selling off this morning, following the US session which also ended lower (see equity section below).

China: Chinese PPI inflation rose a stronger than expected 6.8% y/y in April (consensus 6.5% y/y, previous 4.4% y/y). It was not all due to base effects as the annualized m/m increase was also a high 10.8% and has been hovering between 10 and 15% for five months now. It is driven primarily by the surge in commodity prices and the longer it lasts the higher the risk it spills over to consumer prices. In fact, there are signs that consumer prices are starting to react. The core CPI inflation rate in April increased to 1.3% y/y. While still low it comes from -0.8% y/y in January.

With the current bottlenecks in so many markets globally, there is a rising risk that we will see higher core inflation, which is not just due to base effects but rather demands outpacing supply in goods markets.

Oil: Oil gained yesterday despite news that the Colonial Pipeline, which suffered a cyberattack on Friday, is only set to be restored by the weekend. Some shortages of fuel has already been reported.

Equities:

The inflation scare continued in markets, this time most felt in Europe with markets down 2-3%. US equities managed to recover during the session as investors bought the dip in growth. So, the rotation reversed again with value was under pressure. As a result, Dow ended -1.4% lower while Nasdaq almost surfed at -0.1%. S&P closed down -0.9% and Russell 2000 -0.3%. Sector-wise, energy, industrials and financials were the worst performers while materials, tech and communication services were the relative outperformers. US futures are pointing to another red day this morning though, driven by tech (futures down around 1% for Nasdaq and S&P 500 so no sharp sell-off). Mixed markets in Asia with China higher but Japan and South Korea lower.

FI:

European rates markets sold off markedly yesterday by 5bp in core countries, leaving 10y German bunds at -0.16% which is the highest level since the COVID-19 crisis hit Europe. As such the significant supply and inflation discussions in markets are putting a mark on rates pricing. The long-end supply yesterday with 30y Green German as the most prominent may have been a catalyst for the higher rates, despite strong interest, but additional long-end supply in coming days may also have contributed. Spread widening to the periphery was contained within 1bp. Curves steepened from the long end.

FX:

The response for EUR/USD to declining equities has been mixed and the cross continues to trade above 1.21. It was a quiet day for EUR/GBP. EUR/SEK continues to trade in tandem with EUR/USD. The sharp selloff in equities could easily have prompted a move back toward the upper end of the 10.10-10.20 range, but, so far, the SEK has been resilient.

Credit:

Risk-off hit credit yesterday where iTraxx Xover widened 5bp (to 256bp) and Main 1bp (to 51bp). HY bonds widened 4bp and IG 1½bp.

Nordic macro and markets

In Norway, a sharp downward revision of the January figures points to a marked fall in mainland GDP in Q1. The tightening of coronavirus restrictions in mid-March probably also pulled activity down further in March. We, therefore, expect mainland GDP to fall 0.8% q/q in Q1. That is considerably more than the 0.4% drop projected by Norges Bank in March and spells lower-than-expected capacity utilization going into Q2. That said, the restrictions are now gradually being relaxed, which will push growth up again.

Today the April inflation figures are released. We expect CPI and CPIF to print 2.3 % YoY and 2.5 % YoY, a tenth higher than market expectations, while our forecast for CPIF excl. energy (1.6 % YoY) is the same as the markets. Riksbank's forecasts are a tenth below the market's, i.e. CPIF at 2.3 % YoY and ex. the energy at 1.5 % YoY. Needless to say, uncertainty is very high. April marks the peak of the recent inflation surge according to our forecast (and most other forecasters). From May onwards we expect inflation to recede.