ECB: WHAT ABOUT A DOVISH 50 BPS RATE HIKE? (0919 GMT) The mainstream view is that if the ECB raises rates by 50 bps next week, that's a hawkish signal; if it raises by 25 bps, it isn't. Yet, there might be a different outcome, a sort of dovish reading from a 50 bps hike. This is the fastest tightening cycle of the euro era, and most economists say its impact will take months to become fully apparent. Some have argued it would make sense for the ECB to pause its rate hiking path before making other moves. Theoretically, the central bank next week might decide on a 50 bps rise, while signalling that it's the last one of this cycle. Such a forecast would have to be a little fuzzy, however, as ECB Vice President Luis de Guindos made clear a few days ago that the central bank is unlikely to return to providing guidance on its next policy moves given the uncertainty in the outlook.
David Zahn, head of European fixed income at Franklin Templeton, said a 50 bps rate rise with ECB president Christine Lagarde avoiding signalling the need for further rate hikes could be read as a dovish signal, "meaning the ECB decided to pause its tightening." Around a week ago, Lagarde said the ECB's monetary policy "still has a bit of way to go" to bring back inflation towards its 2% goal.
Zahn says core inflation will drop as companies will not be able to raise prices further while wages in the euro area remain subdued and the purchasing power of consumers is declining. The ECB depo rate is currently at 3%, and most analysts expect a 25 bps rate hike next week. Money markets price in a terminal rate at 3.7% by fall 2023.
(Stefano Rebaudo)
*****
BANKS DRAG ON STOXX (0838 GMT) The STOXX 600 erased earlier gains and is down 0.3%, with a drop in the banking sector offsetting a slew of positive earnings elsewhere.
Banks are down 2.4%, on track for their worst drop in month, while a euro zone banks specific index is dropping 2.8%. UK lender Natwest is down 5.7% as traders brush off a jump in Q1 profit and instead focus Q1 deposit outflows of 20 bln pounds ($24.96 bln). Miners meanwhile are bringing down the basic resources index, down 1.1%, as Chinese demand showed signs of slowing. The index had gained 4.5% over the previous two ays.
Amongst the biggest losers in the sector is aluminium producer Norsk Hydro , with shares down 7% after Q1 results. UK-based copper miner Antofagasta shares are falling 3.3% and weighing on the FTSE 100 .
Media and financial services are at the top on a sector basis, up 0.5% and 0.3% respectively. British education publisher Pearson is the biggest media gainer, up over 3% after saying it's on track to meet forecasts. Electrolux shares are at the top of the STOXX 600 , up 9.3% after Q1 results.
(Lucy Raitano)
*****
BOJ LAUNCHES NO-RUSH REVIEW, BONDS RALLY (0653 GMT) It was a long wait, but the Bank of Japan finally decided to hurry up and do nothing - well, almost nothing.
The BOJ, it seems, will "patiently" continue with easing while "nimbly" responding to developments. Yield curve control remains as is, as do rates at -0.1%. So does the commitment to keeping them until 2% inflation is achieved in a stable manner.
Seemingly the only real change to guidance was to the sentence that it will not hesitate to take additional easing measures if necessary. The BOJ dropped the clause: "it also expects short- and long-term policy interest rates to remain at their present levels or lower". So, it is committed to its easy policy, but rates could go up? A tricky one to square. In the same vein, the bank revised up its forecasts for CPI, while giving mixed signals on GDP. The key CPI ex-food measure is seen at 1.8% for fiscal 2023 and 2.0% for 2024, but crucially not above 2.0% as its remit requires. While the BOJ did commit to a review of its interminable easing campaign, it proposed to finish it within one to one-and-a-half years. No hurry then. For now, the market has taken the statement, and particularly the extended review time frame, as dovish, and pushed the dollar up 0.6% to 134.78 yen. Japanese 10-year bond yields are down almost 4 basis points at 0.425%, and Treasury yields dipped a fraction. A lot of Western analysts assume YCC is done and now we're just arguing over the burial date, whereas the Japanese tend to see everything over the long run: It's only been a couple of decades, what's the rush? In any case, the next policy meeting is not until June 16, so the market has time to prepare. The Nikkei newspaper partly stole the show by breaking the news while the BOJ was still meeting, although the initial reporting was a little confused on what actually the bank was doing and triggered some volatility. Elsewhere, there was a mixed market reaction to results from retail behemoth Amazon which on the face of it beat forecasts with revenue growth of 9% to $127 billion. Its shares surged 10% at one stage, only to finish 2.1% lower after hours. Maybe investors weren't happy that revenue at its much-hyped AWS cloud unit grew by 16%, compared with 37% a year earlier, and the company in its conference call revealed April growth was about five percentage points lower than that.
Intel, on the other hand, talked up the prospect of improved margins in the second half, albeit from record lows, and was rewarded with a share rise of 5% after hours. Looking ahead, a word of warning on the U.S. core PCE price index due later. Forecasts for the Fed's favoured inflation indicator centre on a rise of 0.3% in March, but yesterday's GDP data suggest a risk it could be as high as 0.5%.
Short-term yields have already spiked and market pricing for a Fed hike next week is back up to 85%, so a result like that would not be welcome.
Key developments that could influence markets on Friday:
- ECB chief Christine Lagarde holds a press conference
following a Eurogroup meeting
- Euro zone finance ministers to discuss deposit guarantees
in EU's banking union
- Data on EU GDP for Q1 and German inflation for April
- U.S. personal income and consumption, PCE indexes,
employment cost index and the Chicago PMI
(Wayne Cole)
*****
FLURRY OF POSITIVE EARNINGS SET TO LIFT EUROPE (0643 GMT)
A stream of positive earnings are set to lift European shares at the open, with futures on the STOXX 50 0.5% higher, while FTSE futures are up 0.3% and DAX futures up 0.4%.
Danske Bank on Friday posted a sharp rise in first-quarter results thanks to rising interest rates. The UK'S NatWest also posted better than expected profit for the first three months of 2023. Mercedes-Benz has lifted its outlook for the annual adjusted return on sales of its vans division to 11%-13% from 9-11% previously. Further afield, Japan's Sony Group on Friday posted a record annual profit due to a strong performance at its music and microchip units. Eyes were also on large U.S. tech names on Friday morning, after a bumper week of results. Amazon's Frankfurt-listed shares were down 1.8% after it signaled it expected a slower rate of growth for its cloud business, while Intel shares were up 4.3% after the CFO on Thursday forecast healthy goss margins for the second half.
A few less than stellar results were peppered in amongst the wins.
French fund manager Amundi SA said assets under management fell at the end of the March quarter from a year ago, hit by volatile markets.
Lower oil and gas prices were behind an 11% year-on-year fall in Italian energy group Eni's first-quarter net profit, and Europe's biggest home appliances maker Electrolux , said weaker demand had resulted in lower sales volumes in the first quarter.
(Lucy Raitano)
*****
