The Japanese Yen also seizes the moment, pushing USD/JPY further lower into the 143.60 area

Markets

Core bond yields finished higher yesterday. US rates added up to 6.7 bps and Germany up to 5 bps at the very long end of the curve (30-yr). That happened in a session stripped of important economic data but in the wake of Japanese long-term bond yields (>=30y) surging to records highs. The specific trigger for the latter was a poor 20-yr bond sale but the underlying drivers – fiscal risks combined with central banks leaving the stage – are shared by the likes of Europe and especially the US. An umpteenth warning by the IMF, calling on the US to address its “ever-increasing” debt burden is case in point. UK gilt yields rose as well but more evenly across the curve (+3-4 bps). Bank of England chief economist Pill supported front-end rates with his view on UK interest rates going down too fast. He advocates a slower (than quarterly) BoE cutting pace. Several US central bankers including SF’s Daly and Cleveland’s Hammack held the wait-and-see line. St. Louis Fed president Musalem stressed the importance of keeping inflation expectations in check. Pill nor the Fed policymakers supported their respective currencies. EUR/GBP rose marginally to 0.842, extending the streak of directionless trading since May 12. This morning’s UK CPI numbers fail to break the impasse despite them coming in on the (very) high end of expectations. Headline inflation accelerated 1.2% m/m to 3.5% y/y. The core gauge quickened from 3.4% to 3.8% and services inflation – together with elevated pay increase a key worry for BoE’s Pill – shot up to 5.4% from 4.7%, the fastest pace since August of last year. EUR/GBP keeps earlier gains to hold steady around 0.843. High inflation ties the BoE’s hands even though the economy could use some support. EUR/USD’s mid-May rebound continues with the pair closing near 1.13 yesterday and topping that in Asian dealings this morning. The Japanese yen also seizes the moment, pushing USD/JPY further lower into the 143.6 area. Long-term bond yields in the country increase once again with the 30-yr at some point adding more than 8 bps before paring gains a bit. US yields join the move higher. We have a particular focus on the long end of the curve with the upcoming $16 bn 20-yr bond sale potentially being an interesting one after the flopped auction in Japan yesterday. The sale happens in the face of the lingering fiscal risks and with Trump’s bill maneuvering a way through the SALT discussions in House. We stay cautious on the US dollar. The first meaningful EUR/USD resistance at 1.157 is still some way though.

News and views

In speech looking forward to the next 2028-2023 European Union Budget, European Commission head Ursula von der Leyen indicated that the EU budget should be more flexible, more focused and funded by new revenues amongst others to repay for joined EU borrowing in the wake of the pandemic. Von der Leyen advocates that the budget will have to cope with new geopolitical topics, the trade war, climate change and technological changes. The EU budget currently only amounts to just over 1.0% of GDP and 90% is already rigidly assigned to fixed topics (e.g. agriculture) at the time when it was set up in 2019 & 2020. The next budget will have to be able to respond fast to new challenges. Rather than reimbursing some national spending once a project is completed, the new EU budget should work more according to the principles of the  pandemic fund, linking disbursements to achieving milestones and targets. As a growing part of the next budget will have to go to repaying the funding provided by the pandemic fund, new sources will have to be found for financing existing and new policies.

Japanese trade data for the month of April this morning showed that exports rose 2.0% Y/Y. Imports declined 2.2% compared to the same month last year. The trade balance turned slightly negative to JPY 116 bln. The closely monitored trade surplus with the US printed at JPY 760.5 bln from JPY 846.9 bln in March, but still 14.3 bln higher compared to the same month last year. The US-Japan trade imbalance might be a topic when Japanese Finance Minister Kato meets US Treasury Secretary Bessent at the G7 meeting in Canada later this week. Recent comments indicated that FX policy/the yen weakness might be discussed in the negotiations for a trade agreement between the US and Japan after president Trump announced reciprocal tariffs last month.

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