US curve flattens again and the recession fear is once again out of the bottle

Market movers today

• It is another relatively quiet day in terms of data releases, and hence market focus will be on political developments, notably in Europe following the EU elections.

• The risk of a battle between the EU and Italy is looming after the EU signalled the launch of an EDP on the deviation of Italy's 2018 fiscal figures from the EU targets. Statements from the Italian government suggest Italy will not stand down.

• The Bank of Canada (BoC) is widely expected to leave policy rates unchanged at today's interim monetary policy meeting. At the previous meeting the central bank removed its modest tightening bias and focus today will be on any new policy signals. We do not expect any significant news and see the potential for a moderately stronger CAD on an 'on-hold' announcement.

• In Sweden, first-quarter GDP numbers are released today, where we expect a weaker-than-consensus number (see page 2 for further details).

• In Norway, we have retail sales, where after some weak months we see upside risks that would come after the strong oil investment survey yesterday (see page 2).

Selected market news

US equity markets came under strong pressure last night and closed with broad-based losses and we can expect a negative opening in Europe this morning. Asia is also in red. Lower equities and trade war concerns have pushed 10Y US treasuries yields down to 2.24%, the lowest level since the autumn of 2017. The 2s10s curve flattened further to 14bp. The curve has flattened 7bp in less than two weeks and the discussion of whether the curve is a reliable recession indicator is back on the agenda.

The market continues to focus on Italy, where the more conciliatory rhetoric from Italy we saw late last week is gone after it has become clear that the EU Commission has sharpened its rhetoric towards Italy. Yesterday, Deputy Prime Minister Salvini said that he will devote all his energy to changing the "old and obsolete rules" of the EU. Hence, BTPs remained under pressure yesterday, though it helped sentiment somewhat that EU Commissioner for Economic and Financial affairs Moscovici said that he is not in favour of sanctions against Italy. The EU Commission and Italy will "exchange views" he added.

The political clean-up after the EU elections over the weekend yesterday spread to Germany. Bloomberg reported that Merkel apparently decided that CDU party leader Annegret Kramp-Karrenbauer (AKK) is not up for the job to succeed her as chancellor and that Merkel will stay in her position until her term ends in 2021. The CDU's weak election result on Sunday was probably the main reason why Merkel 'ditched' AKK.

This morning, the Trump administration published its semi-annual FX report and put nine countries on a watch list for being currency manipulators. Importantly, China was again on the list, but was not named as a 'currency manipulator', which could have been in a new escalation of the trade conflict.

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