The Dollar showed some relieve, but gains after all remained very limited

Markets

In our evening Sunset report yesterday, we put the focus on the US 10‐y note auction as US bonds, alongside almost all other (US and non‐US) risk assets, teetered on the brick of a collapse. The auction as such was ok, given reigning sentiment at that time. However, a few minutes after the auction result, the US bond market received a far more important signal: an outright Trump put! The equity sell‐off was the most eye‐catching collateral damage of the escalating trade war. However, from a US government perspective a bond market crash, for sure was a far bigger risk with potential devastating consequences. The US 30‐y yield touching 5%, rather than trading partners proposing negotiations or investors complaining about equity losses, probably was the major reason for president Trump to announce a 90‐day pause on the implementation of the higher layer (> 10%) of the reciprocal tariffs for most trading partners. China was excluded and hit by a 125% duty after it took retaliatory actions. In a first Pavlov reaction, US equity indices jumped between 7.87% (Dow) and 12.16% Nasdaq. The US yield curve bear flattened. The 2‐y yield jumped 18.bps. The need for potential emergency Fed action was removed. Powell can stick to the wait‐and‐see approach. At the same time, risk premia at the long and of the US curve eased albeit modestly. The 10‐y still rose 3.9 bps in a daily perspective. The 30‐y declined 2.8 bps, but both closed well off the intraday highs recorded in Asia. The Trump put at work. The dollar showed some relieve, but gains after all remained very limited. DXY at 102.9 closed only marginally higher. Idem for EUR/USD (1.095 from 1.096). The yen underperformed on recent save haven strength (USD/JPY 161.9 from 160.3). European markets were closed at the time of the announcement of the tariff pause. During the day, bunds clearly took the role of safe haven with yields declining 11 bps (2‐y) to ‐2.8 bps (30‐y). The Bund future contract dropped sharply as this safe haven bid evaporated.

Asian equities join the relief rally from WS with Japan a major beneficiary (Nikkei+ 8%). European futures suggests opening gains of up to 7%. US futures hesitate (Nasdaq future ‐1%). US yields decline further (10‐y ‐3.5 bps). Question remains to what extent this 90‐day pause will remove underlying uncertainty. We assume the downside potential for US yields to remain limited. The Fed might stick to its leaning against the (inflation)wind approach. For the long end, inflation risks and fiscal sustainability issues have not disappeared. Data in the current environment almost always are a bit ‘outdated’. Even so , we keep an eye on March US inflation figures. The 30‐y bond auction will be an interesting challenge for the Trump bond put option. German/EMU yields might rally as the safe haven bid eases. The tariff pause gives the new German coalition time to develop its fiscal response. The picture for the dollar still looks fragile after yesterday’s unconvincing rebound. Sterling came back after the announcement yesterday (EUR/GBP from intraday top near 0.886 to 0.855). Even so, we also keep an eye at the long end of the UK yield curve, with the 30‐y yield at a highest level since mid‐1998.

News and views

Chinese inflation declined by 0.4% M/M in March with prices falling by 0.1% on an annual basis (from ‐0.7% Y/Y in February). Details showed consumer goods deflation of ‐0.4% Y/Y while services prices were slightly higher (0.3% Y/Y). Food prices remain a drag (‐1.4% Y/Y) while underlying core inflation accelerated from ‐0.1% Y/Y to +0.5% Y/Y. On a product level, there was a significant drag coming from transport & communication prices (2.6% Y/Y). Producer price deflation entered its 30th consecutive month with PPI falling by 2.5% Y/Y. Chinese leaders are expected to meet today to discuss additional stimulus plans. Apart from the fiscal side, the PBOC could resume monetary policy easing as well given this extended state of Chinese deflation. Policy makers also allow for a further weakening of the Chinese yuan with USD/CNY fixing at the highest level since 2007 (currently 7.34).

The UK’s Royal Institution of Chartered Surveyors (RICS) residential market survey for March showed market conditions weakening amid an increasingly challenging macro backdrop. Buyer enquiries (net balance ‐32% from ‐ 16%, weakest since September 2023) and agreed sales (‐16% from ‐13%, lowest since end 2023) indicators moved deeper into negative territory while house prices (+2% from +11%) were largely flat at the headline level. Near‐term (3‐month) expectations are now consistent with a weaker outlook for activity (‐26% from ‐16%) and even if twelvemonth expectations are still mildly positive for now (+39% from +47%)..

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