ON DECK FOR FRIDAY, MAY 20

KEY POINTS:

  • Markets are penning thank you notes to China for a change
  • China’s double-barreled cut to mortgage rates…
  • …could take a while to impact appetite for housing
  • Japanese inflation climbs in line with expectations…
  • …and the BoJ will keep dismissing it on durability concerns
  • UK consumers positively surprise…
  • …alongside hawkish comments from BoE’s Pill
  • Early bond close in Canada ahead of Victoria Day
  • No releases on tap in N.A.

World markets are penning thank you notes to China for a change. Its policy easing started by lifting Chinese equities by 1 ½ – 2% on the mainland and 3% in HK as effects rippled throughout the Asian overnight session. As Europe came in, equities rallied by 1–2% and N.A. futures are pointing to an opening gain in the 1% ballpark. Bonds are cheapening in concert to the equity moves with the US Ts curve about 1bp higher which is outperforming somewhat larger selloffs in gilts and EGBs. Asian fixed income mostly went the other direction with Australia, kiwi and Korean yields down while JGBs were slightly richer along portions of the curve. The USD is flat on net with some upside performers including CAD. Oil wasn’t terribly impressed by it all as prices are only a few dimes higher this morning.

Chinese banks cut the key 5-year Loan Prime Rate by 15bps to 4.45% but unexpectedly left the 1-year LPR unchanged at 3.7% (chart 1). The five-year rate is the most impactful to housing so it’s a modest boost to the property finance market. The PBOC had reduced the lower bound for new mortgage rates at the start of the week by 20bps such that after last evening’s reduction in the 5-year LPR, the combined effect is that new mortgages can be offered at 4.25%–4.45%. Now the question is how the rate elasticity performs and it’s likely to be a material lag given the need to continue emerging from lockdowns and restoring something more normal for the economy. Still, a combination of policy easing and relaxing lockdowns could be setting up a more favourable second half for China’s economy.

Japanese CPI inflation climbed in line with expectations (chart 2). April’s headline reading roughly doubled to 2.5% y/y (2.5% consensus, 1.2% prior) and ex-food and energy was up 0.8% y/y (0.7% consensus, -0.7% prior). The yen could not have cared less. One reason is that the BoJ has been clear it will look through a transitory rise driven by higher oil and a softer yen and not adjust its medium-term policy stance as it views the forces behind higher inflation as lacking durability. Another reason is that “Mr. Yen”—the former vice finance minister ages ago in the late 1990s—acknowledged market pricing for then yen toward year-end and said he thinks the BoJ would be concerned if it were to weaken past 150 to the USD.

What may be marginally helping to drive underperformance by gilts is that the UK consumer did much better than feared in April alongside somewhat hawkish sounding comments by the BoE’s Chief Economist. Retail sales volumes were up by 1.4% m/m (consensus -0.3%) with slightly positive revisions that lessened the 1.4% prior contraction by a couple of tenths. Sales ex-fuel were also up by 1.4% m/m (consensus -0.2%). Breadth was ok. Food sales volumes were up by 2.8% m/m, clothing and footwear climbed 1.3% and non-specialized store sales advanced 1.3%. Non-food stores fell 0.6% m/m as a group with household goods down 0.5% m/m and ‘other’ stores off by 3.3%. The BoE’s Pill emphasized that inflation risks were tilted to the upside with possible second round effects on inflation.

Canadian bonds shut at 1pmET ahead of Victoria Day on Monday.

There will be zippo out in the US and Canada today. The Global Week Ahead will be published later on today.

 

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