In today’s briefing:
- Long 10Y, Short 2Y on Yield Curve Normalisation
- Walker’s Weekly: Dr. Jim’s Summary of Key Global Macro Developments – 17 May 2024
- Harvest Headwinds: Extreme Weather and Wheat’s Price Surge
- EA Inflation Eases ECB Cut in June
- HEW: Resilient Data Test Dependency
Long 10Y, Short 2Y on Yield Curve Normalisation
- Fed’s decision to taper its balance sheet runoff has provided support to long-term treasuries, particularly 10-year notes, signaling a potential rise in demand and a move towards yield curve normalization.
- Recent treasury auction results reflect a divergence in demand across maturities; long-term 10-year treasuries show weaker performance compared to strong showings in shorter 3-year and 5-year maturities.
- Data-Dependent Fed is likely to be influenced by improving economic indicators, supporting a normalization of the yield curve. During normalization, the 10Y-2Y spread is the superior instrument for exposure.
Walker’s Weekly: Dr. Jim’s Summary of Key Global Macro Developments – 17 May 2024
US Inflation and Interest Rates: The US CPI for April met expectations, triggering a stock rally, but detailed figures suggest inflation remains high, casting doubt on imminent Fed rate cuts.
Japan’s Economic Contraction: Japan’s GDP contracted by -2% annualized in Q1, marking the third consecutive quarter without growth, yet interest rate hikes are still expected despite the economic downturn.
Indonesia’s Steady Growth: Indonesia reported a consistent 5.1% GDP growth for Q1, in line with expectations and historical performance, though the economy remains below its potential growth rate compared to peers like India and the Philippines.
Harvest Headwinds: Extreme Weather and Wheat’s Price Surge
- Wheat prices are experiencing a significant resurgence due to extreme weather events and global supply-demand imbalances. Price is 22% higher over the past month.
- May WASDE report indicates a positive outlook for global wheat production despite recent weather challenges, suggesting potential underestimations in global supply disruptions.
- The anticipated shift to La Niña, coupled with historically low stocks-to-use ratios, threatens global wheat supply, heightening the potential for increased market volatility and price spikes.
EA Inflation Eases ECB Cut in June
- The final EA HICP inflation print confirmed the unsurprising stability at 2.4% in the April flash release. Energy price base effects will probably push it higher again in May.
- Underlying inflationary pressures have continued falling, with most statistical measures under 3% y-o-y with monthly impulses at or slightly below the ECB’s target.
- Like the consensus, we expect inflation to stay close to 2%. This outlook and subdued underlying pressures will likely ease the ECB’s decision to start cutting rates in June.
HEW: Resilient Data Test Dependency
- UK wage data continues to surpass expectations, however, the Bank of England remains unfazed. There are concerns that premature rate cuts could lead to a financial bubble and policy reversal, akin to the situation in 1998. The UK does not benefit from the Euro Area’s disinflationary data.
- The upcoming week will be dominated by monetary policy speeches and rate decisions from the Reserve Bank of New Zealand, Indonesia, Korea, and Chile.
- UK inflation data is the macro highlight of the week, with expectations aligning with the current CPI consensus. The release of Thursday’s flash PMIs is also of significance.
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