Trump-Xi summit likely has limited market impact
"China’s doors to the world will open wider and wider. American companies will have even better prospects in China," Xi said, quoted by Chinese media (The Guardian here). In intergovernmental relations, the topics likely discussed were related to Iran, Taiwan, access to rare earth metals and technology.
A breakthrough on the most important issues is not expected, but one could, for example, expect an extension of the trade truce signed in October last year (Reuters, here), although since then Beijing has tried, among other things, to strengthen its position by expanding control over rare earth metal supply chains (Reuters, here). In the case of macro data, GUS will today provide the first approximation of GDP dynamics for Q1 (our forecast 3.4% YoY, consensus 3.7% YoY). In the afternoon we will learn the retail sales reading from across the Ocean, which for the aggregate was expected to rise in April by 0.5% MoM, and for the control group (excluding, among others, fuels, vehicles and building supplies) by 0.4% MoM.
Producer prices across the Ocean spiked
Yesterday we argued that the April CPI reading (here) from the US gave far less worrisome signals than the headlines suggested. The same cannot be said about producer price dynamics. The overall PPI rose by 1.4% MoM (consensus 0.5% MoM), pushing the annual figure to 6.0% (consensus 4.8%).
A similarly strong surprise appeared for the core component – 1.0% MoM (consensus 0.3% MoM) and 5.2% YoY (consensus 4.4% YoY). The BLS report shows that producer prices accelerated very sharply for energy goods (7.8% MoM), transport services (5.0% MoM) and trade (2.7% MoM). Partly this is of course a derivative of rising energy commodity prices – diesel fuel has risen by more than 70% since the beginning of the year, which aligns with EIA data (here), as well as jet fuel.
In addition, the shock from the Persian Gulf overlapped with strong rises in industrial metal prices observed since the end of last year. Margins also rose solidly. According to BLS, two-thirds of the PPI price rise in services (including wholesale, retail trade) was due to margin expansion. This contrasts with earlier concerns about subdued demand. It is not ruled out that worries about supply problems and subsequent potential price wars have pushed margins up, and this is a one‑off effect. At this point, however, it is difficult to draw conclusions. Rather, commodity effects with a good economic outlook quickly permeated producer prices, and there is a risk that they will also enter CPI in the near future.
We assess that the spillover of the PPI increase across components is broad. This will be noticed by both FOMC wings. The dovish side will stop speculating on rate cuts, while the hawkish members will increasingly build the argument that without reversing current trends, tightening monetary conditions should be considered.
Pressure on UST remains
Yesterday the middle of the US curve tried to test 4.50%. This was helped, among other things, by a higher-than-expected PPI reading from across the Ocean. Additionally, for the first time since 2007, the Treasury Department placed 30‑year bonds above 5.00%. Both elements showed that pressure on US debt remains, but ultimately in the second half of the session losses were made up and the day ended in a tie. The final yield change did not exceed 1 basis point on UST and the close on the main nodes was 3.98% (2Y), 4.46% (10Y) and 5.03% (30Y).
For most of yesterday’s pricing, German bonds were also under slight pressure (2‑3 basis points up across the curve), but the later recovery of Treasuries also supported Bunds and the day, similar to the result across the Ocean, ended in a tie – 2.69% (2Y), 3.09% (10Y) and 3.62% (30Y). Thursday pricing in Asia was calm and the middle of UST remained near yesterday’s close (4.46%).
As yesterday, we expect relatively moderate volatility. The market was not overly frightened by high PPI, likely assuming that current yields are quite high and may be attractive for some buyers. We expect a similar assessment today.
Regional debt with a chance to recover losses
We have another weak session on CEE FI. Regional papers were slightly hurt by the timing of the close (near record yields on the base FI). This pushed the 10‑year Czech benchmark to 4.97% (+3 bps). The national curve also moved up. This was helped by a slight tightening of PLN IRS (move of 2‑4 bps) and again a slight widening of ASW margin – 1 bps on 10Y.
Ultimately the national curve moved up by 8, 3 and 5 bps to 4.61% (2Y), 5.39% (5Y) and 5.81% (10Y – DS1035). In the background, the Ministry of Finance sold bonds of series OK0129, PS0130, NZ0331, PS0731 and DS0436 for a total of 11.0 billion PLN with a demand of 13.7 billion PLN. Bid‑to‑cover was 1.25.
This is a relatively good result, given external conditions and sales at the upper end of the range. Over the last days Czech and national debt behaved weakly against German papers. We assess that calming sentiment in base markets combined with a good auction yesterday may favor a trend of recovering recent losses. We see potential for a decline in SPW yields for the long end by about 5 bps.
EURUSD – successful defense at 1.17
Risk aversion increased, combined with higher base FI yields and concerns about the effects of higher inflation, hurt EURUSD. The pair tested 1.1170 before noon. In subsequent hours, it managed to recover some losses and the final close was 1.1715 (-0.2%).
The tradition from previous days was maintained for other euro‑linked currencies. The daily change in the franc, pound and yen did not exceed 0.1%. The first Thursday pricing in Europe is around yesterday’s close on EURUSD. We maintain our earlier expectations that the base scenario for the pair remains trading in the 1.17‑1.18 range.
CEE FX resilient to external pressure
As expected, yesterday’s volatility on EURPLN was subdued, and slightly better global sentiment during afternoon trading allowed the zloty to recover part of Tuesday’s losses, with the pair closing the day down 0.15% to 4.2470.
Not much happened in the region either – EURHUF and EURCZK closed the day flat. The start of today’s pricing brings no change to the national currency.
We therefore maintain our position that the risk of EURPLN breaking higher remains limited, and the pair is likely to stay within the 4.23‑4.25 range.
