Heading for a hot (inflation) summer

Market movers today

A light start to the week in terms of data releases today. The US Empire Manufacturing index will be released in the afternoon. Fed's Clarida and Bostic will give speeches in the evening.

Later in the week, Q1 GDP growth figures are released for Japan on Tuesday, we look for another setback of -1%. FOMC minutes of April meeting are released on Wednesday, and there will also be a range of Fed speeches throughout the week. Finally, Markit Flash PMIs for both euro area and US are released on Friday.

With the market focus remaining on inflation risks, we have published a new piece that looks at global manufacturing overheating. Read more here: Global manufacturing heading for a hot (inflation) summer, 12 May.

We have also taken a closer look at the recovery plans submitted to Brussels to access 'Next Generation EU funds', see Research Euro Area - Decoding Europe's recovery plans, 17 May.

The 60 second overview

US inflation and Fed: US inflation surprised on the upside rising 4.2% y/y in April, the biggest increase since 2008. So far the mantra from the Fed has been to look through transitory inflation drivers, but markets will keep an eye on a string of Fed speakers this week to hear whether messaging from policymakers has changed. Muddling the economic picture even more, retail sales unexpectedly stalled in April after a strong surge in March, fuelled by stimulus cheques and the easing of lockdown restrictions. Rising inflation expectations have also started to weigh on consumer sentiment, with the University of Michigan's consumer sentiment survey falling back to 82.8 in May, down from 88.3 in April.

ECB: The ECB minutes from the last policy meeting in April released on Friday gave a balanced message, but also clearly indicated that the June meeting, with new staff projections, will be very crucial for the future path of bond buying. Few concerns were shown about the rise in yields (until the 22 April meeting), with some concern expressed about the tightening credit conditions. Hawks stressed that risks to economic activity and medium-term inflation expectations had become more "tilted to the upside", while the doves argued for the fragile near-term outlook. Last week market-based 5y5y inflation expectations touched 1.64%, the highest level since 2018. Our baseline remains that ECB will decide to slow its purchases at the June meeting.

Equities: A volatile week got a happy ending. Equities took higher courses Thursday and Friday after the broad sell-off on Wednesday. In the US, Dow closed up 1.1% on Friday, S&P 500 1.5%, Nasdaq an entire 2.3%, and Russell 2000 outperforming at 2.5%. All sectors higher on Friday, but growth and cyclicals were the favourites among investors. Energy was the standout along (oil prices posting its third week of straight gains) with tech, consumer discretionary, communication services, and the FAANG complex all higher. Meanwhile, materials, health care, and defensives lagged the market. After exploding to 28 on Wednesday, VIX moved lower again, and sealed the week south of 20. Still, this was not enough to make up for the previous losses with S&P500 down -1.4% for the week. Asian markets are mostly higher this morning, but Japan continues lower. US futures also points to a slight setback, with futures down around -0.3% for the major indexes.

FI: Last week was characterised by the increase in US inflation. However, a large part of the rise is seen as transitory and the comments from the Federal Reserve has supported this. This is also reflected in the stability on the long-end of the US government bond curve, where 10Y US Treasuries moved just 3bp higher during last week. In Europe, 10Y German yields moved 8-9bp higher during last week.

FX: In thin trading commodity currencies and Scandies finished last week on a strong footing. EUR/NOK moved back to the 10.00 figure mark while EUR/SEK moved to the lower end of the 10.10-10.20 range. The greenback was the clear underperformer with EUR/USD notably back above 1.21. EUR/GBP was little changed.

Credit: While CDS indices finished last week on a strong foot, cash bonds were softer. iTraxx Xover tightened 9bp (to 252bp) during Thursday and Friday and Main tightened 2bp (to 50bp). HY widened 1bp and IG widened ½bp.