Two Riksbank speeches to give insight into near-term monetary policy

In focus today

Today, two Riksbank board members will give speeches on monetary policy and the economic outlook, Aino Bunge (8.30) and Per Jansson (16.00). It will be very interesting to hear their comments on the benign March inflation print and the recent global developments, in particular how they assess the perception of delayed rate cuts by the much-important Fed, the sharp weakening of the SEK over the last couple of weeks, and how these factors affect their view on near-term monetary policy where pricing is skewed for a cut in May.

Overnight, we get countrywide Japanese CPI data for March. February inflation spiked to 2.8% on a base effect. Tokyo data indicated that price pressures remain well in line with the 2% target.

Economic and market news

What happened overnight

The Finance chiefs of the US, South Korea and Japan said in a joint statement to "consult closely on foreign exchange market developments" and acknowledge "serious concerns of Japan and the Republic of Korea" on the recent depreciations of both the yen and the won which has prompted markets to speculate on FX interventions. USD/JPY edged slightly lower but remained above 154.

In the US, several Fed speakers echoed the recent commentary of Fed chairman Powell and others in downplaying the prospects of an imminent US rate cut, with Bowman noting that "progress on inflation has stalled" while Mester said the Fed can "hold rates steady for longer if inflation persists".

What happened yesterday

Considerable decline in oil prices, with Brent down more than 3% to 87.3 USD/bbl as of last night. Both supply and demand factors were at play, as it appears a direct Israeli counterattack on Iran is not imminent which has reduced the 'war premium', while a rise in US commercial oil inventories and slightly weak economic data from China suggest benevolent demand conditions.

Final euro area inflation for March confirmed the flash estimate, and furthermore suggested domestic price pressures were still too strong, with the "LIMI" indicator printing at 4.42% y/y. Lagarde has previously stressed not all indicators need to be at 2% to warrant a rate cut however, so we do not think this changes the ECB's view on inflation. It highlights the upside risks from still strong price pressures, however. The Easter component contributed positively which limits the risk of an upside surprise in April from Easter. Market impact was muted suggesting the expectations are still for a June rate cut.

We also got UK inflation which surprised slightly to the upside, with headline CPI at 3.2% y/y (cons: 3.1%) and core at 4.2% y/y (cons: 4.1%). On an m/m SA basis both headline and core were stable but a pick-up in services m/m SA at 0.53% will worry the BoE. Overall, a May cut seems unlikely as inflation is still too high and we will not get any new tier-1 data releases prior to meeting on 9 May. Yields initially rose slightly but ended the day flat.

Equities: Global equities were down yesterday, with US tech and growth stocks leading the decline, while banks and value stocks performed much better on both sides of the Atlantic. This makes a lot of sense given the macroeconomic factors, yields, monetary policy, combined with valuation and earnings evolution. However, we have long seen an extreme appetite for AI-related exposure overriding fundamentals. We argue that the AI frenzy-led dynamics are behind us and recommend more exposure to deep cyclicals and value. In the US yesterday, Dow -0.1%, S&P 500 -0.6%, Nasdaq -1.2% and Russell 2000 -1.0%.

FI: In the absence of a major catalyst, yesterday's market action led to some reversal of the rise in rates seen earlier this week. The stronger-than-expected UK inflation print for March took yields higher in the morning, but the move faded gradually through the session. 10Y Bund yields ended the day down by 2bp in line with the move in the 10Y US Treasury yield. Implied volatility in FI space, measured by the MOVE INDEX, fell markedly yesterday, while credit spreads tightened a bit. The ECB pricing was close to unchanged by the bell with -20bp still being discounted for the June meeting.

FX: After six sessions of consecutive gains, the dollar DXY index dropped yesterday. EUR/USD has continued to move higher overnight, trading at 1.068 vs yesterday's low close to 1.06. USD/JPY has edged lower as the G7 leaders expressed serious concerns about the depreciation of the JPY and KRW. The SEK struggled yesterday despite constructive risk sentiment and interest rates developments. However, both USD/SEK and EUR/SEK are off their highs as equities futures are in green. Brent oil has dropped from the USD 90/bbl handle to around USD 87.5/bbl.