German IFO index improves in April

Germany’s IFO survey for April provided another indication of an economy holding up relatively well amid the headwinds of tightening monetary policy and high inflation. The overall business confidence index increased to 93.6, slightly ahead of market expectations thanks to better-than-expected improvement in the expectations component to 92.2 from 91 in March. The measure of current conditions did drop to 95 from 95.4 a month earlier. Nevertheless, business sentiment has been increasing in Germany for the last six months as high energy costs fade.

Isabel Schnabel, an ECB executive board member, said that a 50 bps hike was “not off the table” for the next monetary policy meeting in May. Schnabel affirmed that more hikes are coming but that their scale would be determined by upcoming data on inflation.

Several regional Federal Reserve assessments of their local economies highlighted slowing activity across the US. The Chicago Fed national activity index remained negative at -0.19 for March, its second month of a row of declining data. The manufacturing index from the Dallas Fed moved more sharply into negative territory with the broad index down to -23.4 for April, from -15.7 a month earlier. The outlook for firms six months ahead also slumped as firms anticipate a further slowdown in activity.

Today’s Economic Data and Events

• 18:00 US New home sales March: forecast 630k
• 18:00 US Conference Board consumer confidence April: forecast 104

Fixed Income

• US Treasury yields pulled higher late in the session with the 2yr UST yield down 9bps overnight to close at 4.0882% while the 10yr yield fell 8bps to 3.4901%. The Fed is in its blackout period ahead of the FOMC meeting next week, leaving markets to their own devices in terms of guidance.
• European bonds were broadly weaker overnight with yields up by about 3bps in German 10yr to 2.504%. French bonds also slipped with yields adding 3bps to 3.066% while gilt yields rose 2bps to 3.774%.
• Fitch upgraded its rating on Sabic to ‘A+’ with a stable outlook. The upgrade follows upgrades to Saudi Arabia’s and Aramco’s ratings.

FX

• The US dollar closed weaker against most peers overnight as markets responded to a drop in UST yields and still hawkish messaging coming from ECB officials. EURUSD rose by 0.6% overnight to 1.1046 while GBPUSD added 0.4% to 1.2486. USDJPY held relatively stable at 134.24.
• Commodity currencies had a more mixed performance. USDCAD closed roughly flat at 1.3541 while AUDUSD showed little change at 0.6696. NZDUSD was more resilient, up 0.5% to 0.6167.

Equities

• There was little concrete direction in US equities at the start of the week, with earnings season seemingly the predominant driver at present. The tec-heavy NASDAQ dropped 0.3%, while the S&P 500 gained 0.1% and the Dow Jones closed 0.3% higher.
• There were slight losses earlier in the day in Europe, where the FTSE 100 closed down just 0.02%, the CAC 0.04% and the DAX 0.2%.
• Locally, the ADX, the DFM, and the Tadawul ended the day 0.2%, 0.8%, and 1.2% higher respectively.

Commodities

• Oil prices began the week on a stronger footing, with Brent futures up 1.3% at USD 82.73/b and WTI gaining 1.1% to USD 78.76/b. There was little in the way of material catalyst to support prices one way or the other beyond the anxiety around supply availability. Despite reaching agreement between Iraq’s central government and the KRG, flows to a major Turkish export hub remain interrupted.