US curve steepens on supply and NIRP speculations

Arne Lohmann Rasmussen Danske Bank A/S

Market movers today

Focus this week continues to be on the reopening of economies in the US and Europe and how it affects the development in the virus numbers.

There are no big movers today on the global agenda but later this week we will have US data on retail sales and Chinese numbers on industrial production and retail sales. An EU Commission proposal on the EU Recovery Fund could also come this week. Focus is on size and funding of the fund.

In Scandi, Norway releases CPI for April, which will be more uncertain than usual as many retailers were closed in April. The Riksbank publishes minutes of the latest meeting (see page 2 for more on Scandi).

Selected market news

Yesterday, UK PM Boris Johnson announced the first small steps to ease the UK lockdown. He urged people that are not able to work from home like those in manufacturing and construction to return to work. He also outlined a plan that included that primary schools will begin to reopen on 1 June and looser restrictions on outside sports. Other measures were tightened including a two-week quarantine for all passengers arriving in the UK.

Many other European countries like Denmark, Norway, France, Spain, Italy and Germany have also started or are planning to lift lockdown measures. However, in Seoul the authorities have been forced to close down bars and clubs after new infections. In Germany the R (reproduction rate) over the weekend jumped to 1.1 after measures were eased.

In the US Trump tries to convince people that it is safe to go back to work as the unemployment rate jumped to 14.7% and more than 20 million people lost their jobs in April. However, the virus has now literally infected the White House and the Vice President has self-isolated from the White House after his press secretary Katie Miller on Friday was diagnosed with COVID-19. Katie Miller is married to Stephen Miller who is part of Trump's inner circle and the main architect of Trump's immigration policy.

The US equity market had a strong Friday as the labour market report was slightly better than feared and analysts pointed to a large number of temporary lay-offs indicating a quick labour market recovery when the lockdown ends. The market also welcomed news that China-US trade representatives discussed the phase-1 trade deal. The positive sentiment has been sustained overnight with equity futures in green. Nikkei is up 1.5% this morning.

In the US fixed income market the treasury curve continues to steepen. The short end (2Y) is kept low as markets price in ‘low for longer'. Furthermore, last week for the first time markets started to price in a probability of Fed funds moving below zero, despite Powell clearly dismissing NIRP as late as March. Powell will hit the wires on Wednesday when he discusses current economic issues in a webinar. The long end of the curve on the other hand is pushed higher by the better risk sentiment and not least by the wave of new longend issuance the coming months. Bond traders have recently been surprised that the US treasury will rely more on long-end issuance than previously expected.

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Arne Lohmann Rasmussen

Danske Bank A/S

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