Markets
News agency Axios has played a prominent part over the past months in reporting on the situation between the US and Iran. Information hasn’t been always that accurate, but financial markets at least treated it as some kind of short term compass. Yesterday, Axios cited two US officials on an agreement on a 60-day MoU to extend the ceasefire and launch negotiations on Iran’s nuclear program. They added that US President Trump still had to give his final approval to the diplomatic breakthrough. The interim deal would contain “unrestricted” shipping through Hormuz (no Iranian toll system) with Iran vowing to remove all mines within 30 days. The US would lift its naval blockade in proportion to the restoration of commercial shipping. The MoU would include an Iranian pledge not to pursue a nuclear weapon, but what to do with the pile of highly enriched uranium remains unsolved. The same goes for the release of frozen Iranian funds. Markets started regaining hope on a way out of the stalemate since the previous weekend. Brent crude currently trades around $92.5/b compared with last week’s close around $104.5/b. Yesterday’s $4/b intraday-drop offered support for both bonds and risk assets. The US yield curve bull flattened with yields ending 1.1 bp (2-yr) to 3.8 bps (30-yr) lower. German yields shed 2 to 3 bps across the curve. Intraday swings were larger though as core bonds had been suffering early on the session. Main US equity benchmarks closed up to 0.9% (Nasdaq) higher following an hesitant start. EUR/USD at first attempted to settle below 1.16 yesterday, before returning to the 1.1650 comfort zone. We continue treating these developments cautiously as on the face of it, the interim deal has more of buying time rather than effectively moving towards a workable solution.
There were plenty of eco data yesterday. US April PCE deflators were a tad softer-than-expected on a monthly basis with headline growing by 0.4% and core by 0.2%. Annual figures nevertheless matched consensus with rises from 3.5% Y/Y to 3.8% Y/Y for the top number and from 3.2% to 3.3% for the underlying series. Next month, our KBC Nowcast suggests a first 4%-reading since May 2023. Based on the unconditional forecast, that could remain the case for several months. Minutes of the April ECB meeting suggested that a June rate hike is in the making: “It had become increasingly likely that adopting a ‘looking through’ approach was not appropriate. It was argued that this situation shifted the primary focus to determining the most appropriate timing for a rate increase.” A number of officials wouldn’t have opposed moving already in April. Today’s eco calendar has some national European inflation numbers in store which could further cement the case. France, Spain, Italy and Germany all report today.
News & Views
CPI inflation in the Tokyo area, which is seen as a precursor for national Japanese trends, eased further this month. CPI ex fresh food rose 0.3% M/M and 1.3% Y/Y (from 1.5%). The core measure excluding fresh food and energy also eased to 0.1% M/M and 1.6% (from 1.9%). However, government measures to trim the cost of utility prices and tuition fees were for a large part responsible for the softer set of inflation data The easing in inflation comes as the BOJ assesses the timing of a next rate hike, probably already at the June16 policy meeting. Aside from mild Tokyo CPI data, a series of national data including April industrial production (+ 0.8% M/M), retail sales (1.3% M/M and 2.1% Y/Y) and labour market data (jobless rate from 2.7% to 2.5%) all come in on the better side of expectations. Today’s data releases don’t change money market expectations for the June policy meeting. Markes still discount a 75-80% probability for a rate hike from 0.75% to 1%. The yen trades little changed (USD/JPY 159.3).
The South African Reserve Bank (SARB) yesterday raised its policy rate by 25 bps to 7%. It was a spilt decision. The move was supported by 4 MPC members. Two policymakers preferred to keep the policy rate on hold. Governor Kganyago indicated that also a 50 bps step was discussed, but that the SARB preferred a more cautious approach as it awaits more data. The hike comes as inflation rose to 4% from 3.1% in April. This was mostly due to higher energy costs, but services inflation also accelerated to 4.6%. The SARB has a 3% inflation target (+/- 1% tolerance band). The SARB also raised inflation forecasts for this year and next year to 4.4% and 3.7% respectively and indicated that these forecasts entail some second round effects. The SARB explored three scenario (also taking into account the potential effects of El Nino), but all these scenario’s imply higher inflation and lower growth (expected at 1.2% this year from 1.4%). They also took notice of a stronger ZAR than last year, helping to contain imported inflation. The rand yesterday continued it recent rebound with USD/ZAR trading near 18.9.
