Daily Commentary BY THE CURVE TEAM –

Tensions Ease

31st of May, 2018

A crisis in Europe appears to have been avoided for now as those involved in the political maelstrom have made efforts to get on with things following the markets acute reactions. Oil has reversed some of losses from last week as OPEC borrows a play from the Feds playbook while key data overnight made for interesting reading.

The Italian President, who had contributed to the mess in Italy by vetoing the proposed finance ministers appointment, has reached out to broker a deal to avoid Italians heading back to the polls. That helped a number of markets recover overnight as some of the fear trade that reverberated around markets subsided.

Helping the recovery was a somewhat successful Italian bond auction which was well supported. The pricing suggests that we aren’t out of the woods but for now things seem to be moving in the right direction.

Oil retraced some of last weeks losses following comments from OPEC on the prospect of production increases. It was reported overnight that and changes to production will be done “in a gradual and deliberate fashion.” 

There was a couple of data highlights to note over the past 24 hours. Inflation data in Germany came in well ahead of estimates. The market was expecting a moderate rise of 0.3% for the months following a 0.1% decline the previous month. The actual result was double expectations with saw the annual rate jump from 1.4% to 2.2%, above the ECB’s 2% target.

Meanwhile in Australia building approvals fell more than expected in April thanks to a large fall in the usually volatile apartment sub component. What was interesting is that private house approvals continue to trend higher despite housing fundaments softening in recent months.

There is plenty more data to come in the next 24 hours. The highlights will be the latest private capex report today in Australia which will feed into next weeks GDP release. This will be followed by the PCE inflation data in the US which the Fed will be watching closely.

David Flanagan

Director - Interest Rate Markets