Rise and shine everyone.

Asian stocks closed lower today with Japan's Nikkei dropping by 1.5% but Korea's Kospi slightly gaining.

In Australia, bond yields continued to decline following global trends. The 3-year Australian government bonds traded at 3.90%, reflecting a consistent drop in yield, particularly after the Reserve Bank of Australia's recent decision to hold rates, and weaker retail sales data that came out yesterday.

Sweden's Riksbank has initiated its first easing since 2016 cutting rates by 25bps to 3.75%, prompted by inflation nearing its target and a slowdown in economic activity. The Riksbank forecasts two additional rate cuts in the second half of 2024. As a result, the Swedish Krona has weakened following the central bank's indication of future cuts.

Meanwhile, the Bank of England is expected to maintain its current policy in the upcoming decision tomorrow (Thursday). The Shadow Monetary Policy Committee advises maintaining the current rate but suggests considering policy relaxation in June, reflecting the complex environment of balancing economic growth and inflation control.

US Equity Futures are also under some pressure this morning, alongside Oil which has pulled back to 77.63. The US Government announced that they are soliciting 3.3 million barrels of oil for the SPR. Precious metal and Bitcoin are more or less flat while. The US Dollar Index and Yields are higher, with the curve steepening.

The Market favors Tactical Trades in Bonds

Last week saw a continued preference for short-term investment-grade (IG) funds, with inflows into these funds remaining uninterrupted and outperforming their mid- and long-term counterparts. This trend underscores investor confidence in the front end of the IG curve. The ongoing shift towards shorter-dated credit is supported by a "higher-for-longer" interest rate outlook in the U.S., which is likely putting pressure on duration trades, suggesting a more favorable upside in shorter-dated credit sectors.

The broader bond market dynamics reflect adjustments to Treasury yields, with the 5-year yields recently enriching against the 2-year and 10-year counterparts since the 10-year yield peaked at 4.735% on April 25. Despite a cooling labor market leading to reduced yields across various maturities, the April payroll data showing slower-than-expected wage growth and job gains did not drastically alter the Federal Reserve's cautious stance. The market has tentatively moved up its expectations for a rate cut, though the Fed awaits more definitive signs that inflation is steadily returning to its 2% target. The recent market activity, particularly in short-term IG funds, highlights a strategic shift among investors navigating the current economic climate and the asymmetric sensitivity of the Fed to new economic data.

US Pandemic Era Saving are Gone

The San Franciso Fed says Pandemic Era Excess Savings are Gone. This, however, may not weigh on consumer spending as much given the relatively strong job market.

"Excess savings were built up over a period of 18 months, from the onset of the pandemic recession in March 2020 until August 2021.

We estimate that excess savings at the aggregate level peaked at $2.1 trillion in August 2021 and were steadily depleted over the subsequent 2½ years.

Nevertheless, the depletion of these excess savings is unlikely to result in American households sharply cutting their spending levels as long as they are able to support their consumption habits through continuous employment or wage gains, other forms of wealth—including non-pandemic-related savings—and higher debt."

The Yen Continues to Weaken despite Ueda’s Comments

The recent statements from Japanese Finance Minister Suzuki and Bank of Japan Governor Ueda reflect a cautious yet adaptable approach to managing Japan's monetary policy amid fluctuating FX rates. Suzuki emphasized no fixed FX level but expressed concern over rapid exchange rate movements while refraining from confirming any market interventions.

Governor Ueda, meanwhile, noted that while the BOJ's policy isn't aimed at controlling FX rates directly, it significantly impacts inflation. He stated that the BOJ would adjust easing if inflation trends shifted, acknowledging risks from external factors like rising oil prices and yen depreciation. Ueda described a strengthening economic cycle but maintained a balanced view of Japan's moderate yet uneven recovery.

This discussion on adjusting easing (tightening) however, didn’t seem to have the desired effect and the Yen continues to weaken.

Calendar

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)