Markets today might gradually look for a new equilibrium after yesterday’s sharp repositioning

Markets

Substantial progress in the trade negotiations with China this weekend in Switzerland as touted by the US administration triggered an impressive reflationary move of global markets. Both US and most other core bond yields jumped sharply higher in an impressive bear steepening move. US yields rose between 11.9 bps (2‐y) and 7.1 bps (30‐y). Markets scaled back expectations on Fed easing this year from 75 bps last week tot about to 50 bps eoy. A first rate cut also is pushed to the September meeting rather than July as expected before last week’s Fed meeting. Fed Chair Powell at least can consider his  reactive rather than a proactive approach fully validated by the administration U‐turn on tariffs. With the Trump administration still working on deregulation and tax cuts, the case for a higher‐for‐long approach is strengthened even further. Of course, further down the road, the Fed still might come in a position to ease policy as the impact of current uncertainty on growth at some point still might filter through. However, the timing probably will be later rather than sooner and isn’t the focus of the market momentum at this stage. European/German bonds even slightly underperformed especially at the short end of the curve, with German yields adding between 12.8 bps (2‐y) and 6.2 bps (30‐y), safe haven bunds understandably underperforming   swaps. Of late, the impact of the trade war on Europe was assessed as outright deflationary by at least part the ECB MPC members. In case of a further de‐escalation and/or progress in EU‐US trade talks, this argument might lose some weight, too. ECB hawks recently at least become a bit more vocal with Isabel Schnabel this weekend and Buba president Nagel but also Spanish Member Escriva to some extent joining the idea that current volatile environment might be a good reason not to overreact to short term developments. European markets reversed recent bets for the ECB to cut rates below 1.75%. Especially US equity markets reacted euphorically with the Nasdaq (+4.35%) more than reversing the post‐Liberation Day sell‐off. The Eurostoxx 50 even is nearing the cycle top reached early March. On FX markets, the dollar now is the preferred risk currency. DXY came with reach of the 102 barrier. EUR/USD briefly dropped below 1.11 (close 1.1086). USD/JPY (164.6 close) is nearing the 164.9/166.7 range top).  

Markets today might gradually look for a new equilibrium after yesterday’s sharp repositioning. US equity futures, US yields and the dollar this morning are ceding marginal ground. Regarding the data, ZEW economic sentiment deserves some attention. In the US, we look for the NFIB small business sentiment and even more for the US April CPI. Markets will look whether some tariffs related prices rises already are filtering through. Consensus expects 0.3% M/M both for headline (2.4%Y/Y ) and core inflation (2.8% Y/Y). An upward surprise might only reinforce Powell’s reactive approach. Such a scenario might support the rise in yields, but probably won’t be good news for the risk rally. The impact on the dollar also might be more mixed. However, it’s too early to anticipate on a genuine trend reversal on yesterday’s repositioning.  

News and views

UK retail sales rose by 6.8% Y/Y in April, rising from 0.9% in March and beating consensus estimates (2.3%). The British Retail Consortium pointed out that Easter falling in April rather than March artificially lifted sales (and weighed on growth in March). The sunniest April on record also provided a boost to sales. Food sales increased 8.2% Y/Y while non‐food revenues rose by 6.1% Y/Y. BRC CEO Dickinson nevertheless warned for clouds on the horizon as “new costs begin to bite”. She refers to an estimated £7bn of costs to the industry coming from higher Employer National Insurance Contributions, the higher National Living Wage and a new packaging tax.

Bulgarian President Radev filed a request to parliament to organize a referendum on euro adoption. The proposed referendum question "Do you agree to have Bulgaria adopt the single European currency euro in 2026?" will test the democracy and provide an opportunity to hear all the arguments for and against the monetary policy move. The politically loaded push comes as the country waits the June 4 publication of convergence reports by the EC and the ECB and against the background of a divided political and societal landscape. A similar request for euro referendum was filed by the far‐right pro‐Russian Revival party and eventually rejected by the country’s constitutional court. Interior minister Mitov called the referendum “a clear act of sabotage against the introduction of the euro in Bulgaria” with PM Zhelyazkov urging lawmakers to ignore the President’s request.

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