ECB: Centeno Sticks To Dovish Script

• Treasuries have firmly bear steepened, primarily in continued reaction to the Moody’s downgrade late Friday but also with heavy supply impacting EGBs.
• Moody’s on Friday downgraded the US from Aaa to Aa1, the last of the major rating agencies to downgrade from AAA. As noted earlier, bank’s risk-weighted capital asset calculations shouldn’t be materially impacted following changes in prior episodes. It does however help build on long-end angst seen in particular since early April.
• The House Budget Committee approved President Trump’s tax and spending package late Sunday night after an agreement to speed up cuts to Medicaid health coverage appeased four Republicans who subsequently abstained from the vote.
• Cash yields are 0.7-7.9bp higher since Friday’s close, with increases led by 30s.
• 30Y yields have seen highs of 5.0269% (currently 5.0227) for highs since Nov 2023, in clearance of the 5% handle that had proved solid resistance in the interim.
• 5s30s is 3.8bp higher at 89.3bps, still shy of the multi-year high of 100bps on May 1.
• 2s10s has seen a more pronounced steepening on the day and intra-session however, currently +5.9bps at 54.2bps for highs since May 6.
• TYM5 trades at 109-24 (-18+) having earlier hit 109-22+, on elevated cumulative volumes of 540k.
• It has stopped short of probing support at 109-18+ (May 15 low), after which lies a key 109-08 (Apr 11 low), with US desks filtering in, having on Friday bottomed out at 109-31 in the initial reaction in late US trading.  
• Data: Conference Board Leading Index Apr (1000ET)
• Fedspeak: Bostic (0830ET), Jefferson (0845ET), Williams (0845ET), Logan (1315ET), Kashkari (1330ET), Bostic (1445ET) – see our Fedspeak bullet 0604ET.
• Bill issuance: US Tsy $76B 13W & $68B 26W bill auctions

Although Thursday's May flash PMIs headline this week's Eurozone data calendar, there will also be interest in the ECB’s Q1 negotiated wages print on Friday. There isn’t a solid consensus for the data, but the ECB’s forward looking wage tracker alongside some sell-side estimates we have seen suggest a reading around 2.5-2.7% Y/Y. This should be viewed as consistent with existing ECB projections, and have limited impact on rate cut pricing.

• Q4 ‘24 negotiated wages were 4.13% Y/Y, down from 5.43% in Q3. This indicator can be volatile quarter-to-quarter, as it includes one-off payments in wage agreements.
• The ECB’s forward looking wage tracker, which is publicly released the Wednesday after each monetary policy decision, currently tracks wages with unsmoothed one-off payments at 2.51% Y/Y.
• The smoother ex-one-off payments tracker is currently at 4.43% Y/Y for Q1.
• The March Eurozone Indeed wage tracker was 2.67% Y/Y (vs 2.86% in February).
• The ECB projects Q1 compensation per employee growth at 3.8% Y/Y (vs 4.09% in Q4). This data will be released on June 6 alongside the final Q1 national accounts, the day after the ECB’s June decision.
• Summarising a few recent sell side views on negotiated wage growth:
  • Morgan Stanley: “In January and February, euro area negotiated wages were running around 3.1%Y. As per preliminary data from Destatis, the year-on-year growth rate of German negotiated wages in March could be very low, maybe even negative, because of base effects from very large one-off payments in the same month last year (mostly in the public sector). If confirmed (we will have German March data from Bundesbank on Thursday), this would push down the quarterly reading for the euro area to, we think, 2.7%Y in 1Q25”.
  • Nomura: “We forecast euro area negotiated wage growth to slow to 2.6% y-o-y in Q1 2025”…”Our euro area aggregate forecast is based on 65% of country-level data that are already available and our expectations for the remaining data. The main elements not yet published are German data for March 2025 and French data for the entirety of Q1 2025”.

• Both JPY and CHF underperform against EUR, GBP and Scandi FX, failing to benefit from equity weakness and the risk-off tone following the Moody's US downgrade. - However, CHF and JPY's relative underperformance is consistent with higher yields and steeper curves across bond markets, and further questions around US credit worthiness could keep the pressure on low-yielding currencies.
• Moves are most apparent against the Euro, with EURJPY at 163.27 after clearing its 20-day EMA. Initial resistance is clustered at a set of highs just above 164.00 ahead of the key 165.21 level, the May 13 high and bull trigger.
• EURCHF continues to trade within recent ranges, and just below resistance at 0.9447, the highs seen on April 25. A break of that level would open up a set of highs slightly above the 0.95 handle.