Energy and risk off whack breakevens
Euro cash breakevens finished near session lows today after demand for duration surged as the tone swung sharply back to risk-off following renewed losses for US bank stocks after the sale of First Republic, softer-than-expected JOLTS data, and a sharp fall in energy prices.
Brent futures plunged by 4.7% to under $76 at the London close while Dutch gas futures fell by 3.4%. Elsewhere, the Euro Stoxx lost 1% and TIPS breakevens fell by 3-10bps with the front end of the US inflation curve worst hit.
Despite taking down €410m in Bundei-33 linkers at -0.04% without too much obvious indigestion in the morning (bids of €538m just about exceeded the DFA's €500m target and the bond allied in RY to outperform on the day), euro breakevens fell by 2-4bps and OATei real yields rose by 1-2bps in the long end.
Data showing headline euro flash HICP rising a tick to 7.0% while core inflation edged down to 5.6% failed to provide much support for breakevens, although analysts quickly warned that the core data still looked solid (see below).
In swaps, with the roll underway trades on the SDR included EUR 5y May towards the end of the day at 2.3675% and 2.37% in €50m each, following a number of clips at 2.4509% (-7.41bps versus EUR 5y Apr at 2.525%) in the morning. Unusually, EUR 17y traded at 2.564% in €15m around lunchtime.
Ahead, Spain will sell €250-750m in SPGBei-27 linkers on May 4, after the Fed but shortly before the ECB interest rate decision.
Core provides the headlines - banks
Barclays reviews the headline inflation data and finds that: “while energy and fresh food prices declined last month, likely driven by input cost disinflation and improved supply conditions, processed food prices were still up on the month, showing that lower energy and agricultural commodities prices are still propagating down the value chain with significant delays.”
Also, energy prices fell much less than Barclays expected as utility prices likely stayed significantly elevated. A “peculiar” case was Italy, “where preliminary gas HICP inflation printed +12% m/m while electricity HICP fell ‘only’ by 11% m/m despite a 50% drop in the regulated electricity tariff rate in April,” the bank notes.
Meanwhile the deceleration in core inflation was mainly driven by non-energy goods components which registered smaller price increases in April, according to Barclays.
However services prices “continued to exhibit very robust momentum” and underlying dynamics were also stronger than Barclays had forecast:
- “Our expectation of a robust services inflation print last month was based on assumption of a seasonal increase in prices of package holidays in Germany. This has not materialised as the regional CPI data in Germany shows package holiday prices rose only 1.4% last month, which means that inflation in other services sub-components ended up more strongly than we had expected.”
“We do not rule out an upside surprise in volatile components making up for the miss in package holidays inflation compared to our forecast. For example, April air fares were up 15.6% m/m nsa in Germany, according to the CPI data from German regions, and 29.5% m/m nsa in Italy CPI. However, it is also plausible that inflation in core services sub-components (housing, health, communications, miscellaneous) was above our projections, which could be an important factor in the assessment of EA underlying inflation stickiness.”
Elsewhere, BNP Paribas suggests that the tick downwards in core inflation helps to support the case for a 25bps hike this week rather than 50bps, but warns that its “too early to declare a trend”.
- “Our faster indicators suggest that the direction for core inflation remains ambiguous in the short term, and in our own forecast, we do not expect any meaningful declines in core inflation until August
“(Also) April’s core print masked diverging trends among components. There was a substantial decrease in core goods inflation, which had been anticipated for some time by softness in manufacturers’ output prices and lower delivery times. This more than offset a pick-up in services inflation, which will concern the ECB. Not least because services inflation is a better guide to domestically generated inflationary pressures, and momentum in this component picked up again in April.
“Going forward, we think inflation in services could prove sticky and even accelerate slightly as strong wage growth feeds through to prices on the back of buoyant services activity. As services represent over 60% of the core basket, this is likely to add significant persistence to core inflation on its way down.”
New issues: Flurry of MTNs
Banks have launched a flurry of inflation-linked MTNs over the last few weeks including the following:
- Santander sold a €50m EMTN due 15 May 2033. Coupon pays euro HICPx +1.45% floored at 0%. Self-led.
- Barclays Bank sold a €50m EMTN due 11 May 2033. Coupon pays 1.72 * euro HICPx. Self-led.
- Merrill Lynch sold a €50m EMTN 1.45% due 11 May 2033. Coupon and redemption linked to euro HICPx. Self-led.
- Morgan Stanley sold a €50m EMTN 1.95% due 11 May 2035. Coupon and redemption linked to euro HICPx. Self-led.
- Deutsche Bank launched a €50m (max) inflation-linked note due 4 May 2027. The EMTN pays 1.3 * euro HICPx inflation floored at 0%. Self-led.
- SocGen launched a €30m (max) inflation-linked note due 27 Apr 2026. The note is linked to euro HICPx inflation floored at 1.5%. Self-led.