ECB makes a hawkish 25bps hike

Following on from the Fed’s 25bps hike on Wednesday, the ECB followed suit with its own quarter point raise yesterday, taking the benchmark deposit rate to 3.25%, in line with expectations and its highest level since 2008. This was a smaller move than the previous three 50bps hikes, but it was arguably a hawkish hike given both the statement and the commentary. ECB President Christine Lagarde said at the subsequent press conference that some voices were calling for 50bps and some for 25bps, but that nobody wanted to stay pat. With inflation stubbornly high, there is likely at least one more move to follow, and Lagarde said that ‘We have more ground to cover and we are not pausing, that is extremely clear’, adding that ‘Our future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target.’

Initial jobless claims in the US in the week to April 29 were at 242,000, just above predictions of 240,000 and up from 229,000 the previous week. This was the largest uptick for the measure in the past six weeks, in a further signal that the US labour market is starting to slow after a bout of remarkable resilience through the past year. Markets will be watching for the NFP print for April this afternoon, with the consensus forecast for a net gain of 182,000.  Meanwhile, labour unit costs rose 6.3% q/q, higher than consensus expectations of a 5.6% gain and up from 3.3% in Q4, underscoring the ongoing difficulties facing the Fed in bringing wage inflation back down.

Today’s Economic Data and Events

• 16:30 US nonfarm payrolls, April. Forecast: 182,000
• 16:30 US unemployment rate, April. Forecast: 3.6%

Fixed Income

• Anxiety over banking system stability in the US appears to be the driving force for US rates at the moment. Yields on the 2yr UST fell below 3.7% at one point during the trading day before recovering to close at near 3.8%, down about 1.5bps on the day. The 10yr yield showed a similar move but ultimately closed at 3.387%, up by about 4bps.
• European bond markets closed the day stronger even as the ECB messaging remained on a hawkish edge and the prospect of additional hikes after yesterday’s 25bps move remains high. Bund yields nevertheless fell by about 6bps to 2.186% while French bonds and peripheral markets closed the day stronger. Gilt yields dropped by 4bps to 3.646%.

FX

• The apparent commitment from the ECB for more hikes failed to enliven currency markets with the dollar getting a boost against the Euro as financial stress fears are in the main narrative for markets at the moment. EURUSD fell 0.5% to 1.1012 while GBPUSD closed marginally higher, up by less than 0.1% to 1.2574. USDJPY dropped for a third day running, closing at 134.29.
• Commodity currencies had a positive day with all pairs moving stronger against USD. USDCAD fell by 0.6% to 1.3539 while AUDUSD dropped by 0.3% to 0.6693 and NZDUSD added0 .8% to 0.6281.

Equities

• European equities were under pressure yesterday, weighed down by both the ongoing concerns around the US banking sector, and hawkish messaging by the ECB. The composite STOXX 600 ended down 0.5%, with the CAC losing 0.9%. The UK’s FTSE 100 dropped 1.1%.
• In the US, the NASDAQ, the S&P 500, and the Dow Jones lost 0.5%, 0.7%, and 0.9% respectively.
• Locally, the ADX added 0.3% and the DFM 0.4%. Saudi Arabia’s Tadawul closed up 0.4%.

Commodities

• Oil prices notched a paltry gain, at least in Brent markets overnight, with futures up 0.2% to USD 72.50/b, far short of recovering the 9% drop recorded in the prior two days. WTI settled near unchanged at USD 68.56/b, down less than 0.1%.
• Iraq has still not found agreement with Turkey on resumption of exports via a pipeline that links the two countries. Roughly 450k b/d of crude would normally be able to pass through the export channel.