ON DECK FOR THURSDAY, MAY 11
KEY POINTS:
- Cautious markets drive stronger USD, lower sovereign yields
- BoE hikes 25bps, guides more to come, as markets offered little reaction
- Chinese credit expansion slows
- Chinese inflation strays further beneath the PBoC’s target
- Trump is a reckless downgrade threat
- US producer prices may rebound
- US initial claims still rangebound?
Global risk appetite is mixed across asset classes. Equities are mixed with US and Canadian futures little changed along with the average across European cash markets. The USD is gaining against all major crosses. Sovereign yields are mildly rallying across major markets including the UK where the gilts front-end only gave up a mild amount of its rally post-BoE. Chinese data for April added to weakening concerns after a robust start to the year. Another US inflation gauge is on tap and Trump proved for the millionth time that he’s thoroughly unfit to run anything more than an ice cream truck.
The Bank of England delivered a mildly hawkish surprise this morning as this note is being published through Governor Bailey’s ongoing press conference. The expected +25bps hike to a new policy rate of 4.5% was delivered. There was no change to QT guidance. Growth was upgraded by removing the previously forecast recession and eliminating any negative quarters for GDP growth and the inflation forecast was also raised. That monetary policy is fighting fiscal policy’s influences upon inflation was made clearer by upgrading the fiscal policy contribution to growth to 0.5% this year from 0.3% after Sunak’s earlier budget. There were two dovish dissenters who preferred no change today. Markets continue to price a higher terminal rate (chart 1).
Chinese inflation ebbed by a little more than expected and is practically nonexistent. CPI was up 0.1% y/y in April (0.3% consensus) which takes the reading back toward the lows that were being registered in early 2021. Core CPI was unchanged at 0.7% y/y. Producer prices fell 3.6% y/y largely due to already known oil price and other generally soft prices.
China also updated monthly financing figures for April that fell well shy of expectations. Aggregate financing was up 1.2 trillion yuan (2T consensus) and new yuan loans grew by 719B (1.4T consensus). This follows rapid Q1 growth as China pursued credit easing over monetary easing given yuan stability concerns. Year-to-date financing figures remain very strong because of the Q1 start (charts 2 and 3), but this is having relatively little effect on the year-over-year growth in outstandings (charts 4, 5).
As a result, while the gilts front-end is still slightly dearer on the day, the post-statement reaction saw the 2s yield rise by a modest 5bps and sterling is still weaker to the dollar on the day but by less than before the statement.
US core producer prices are forecast to rebound from the prior month’s -0.1% dip. I’m a little higher than consensus at +0.3% m/m SA nonannualized. Initial jobless claims have been stuck in a 230–250k range since early March as they slightly picked up from the prior 200–220k pace. They have not materially changed between April & May nonfarm reference periods.
And icymi, Trump did indeed say in last evening’s CNN town hall with a grossly outmatched and inexperienced “moderator” that the US should default if the GOP cannot secure major spending cuts in the debt ceiling dispute. He said it would only result in “a bad week, or a bad day” and that the issue is just “psychological.” That will egg on the minority in the House who set a lower recall bar on Speaker McCarthy’s performance. Granted, Trump’s just a bag of wind on any given issue. Still, he’s an instant downgrade threat if elected in 2024 due to the threat that he poses to debt markets and the entire institutional framework. So, add default risk to a list that includes protectionist, seditionist, sore loser, fiscally liberal, science-bashing, Putin-loving, lying, Constitution-hating, misogynist among many other flaws.
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