STIR: CH-EU Trade Diversion Still A Risk Even If CH-US Tariffs Come Down
May-09 07:38
A more constructive risk backdrop on hopes of a US-China trade deal over the weekend has tempered ECB rate cut expectations the past two sessions. Year-end ECB implied rates are now 7bps more hawkish than Wednesday’s close, with meeting-dated OIS now pricing 58.5bps of easing through December (vs 59.5bps yesterday)
- However, it’s worth remembering that tariffs on China would need to come down significantly from current levels to make any trade with the US economical. Even targeted levels of around 60% may be too high. In this scenario, the risk of disinflationary Chinese trade diversion into the Eurozone remains, which alongside downside growth risks underscores dovish analyst rate cut forecasts.
- Chinese trade data overnight showed the surplus with the EU is now larger than that with the US.
- OIS continue to essentially fully price a 25bp cut in June. This morning, ECB’s Rehn (a dovish leaning centrist) suggested such a move was the right one if forecasts are confirmed.
- ERZ5 tested the May 5 low at 98.275 overnight. The contract has now fully unwound the dovish adjustment seen following the ECB’s April decision. Euribor futures more broadly are -1.0 to -6.5 ticks through the blues.
- Today’s regional data calendar is light, with Italian March industrial production due at 0900BST. There may be upside risks to the 0.5% M/M consensus given stronger-than-expected prints in Germany and Spain already this week.
| Meeting Date | ESTR ECB-Dated OIS (%) | Difference Vs. Current Effective ESTR Rate (bp) |
| Jun-25 | 1.940 | -23.1 |
| Jul-25 | 1.829 | -34.2 |
| Sep-25 | 1.685 | -48.6 |
| Oct-25 | 1.642 | -52.9 |
| Dec-25 | 1.587 | -58.4 |
| Feb-26 | 1.577 | -59.4 |
| Mar-26 | 1.577 | -59.4 |
| Apr-26 | 1.589 | -58.2 |
| Source: MNI/Bloomberg. | ||
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US-CHINA: China Releases White Paper As 104% Trump Tariffs Come Into Force
Apr-09 07:36
(MNI) London - State-run Xinhua reports excerpts from a white paper from the State Council Information Office regarding US trade and economic relations. The report claims that "in recent years, the rise of US unilateralism and protectionism has seriously interfered with the normal economic and trade cooperation between China and the United States."
- In response to US tariffs, "China has no choice but to take strong countermeasures to resolutely defend its national interests. At the same time, China has always adhered to the basic position of resolving disputes through dialogue and consultation,"
- Xinhua: "These restrictive measures, which use tariffs as threats and coercion, are a mistake on top of a mistake, and once again expose the typical unilateralism and bullying nature of the United States. They not only violate the laws of the market economy, but also run counter to multilateralism,"
- Xinhua: "It is hoped that the United States and China will meet each other halfway, follow the direction indicated by the call between the two heads of state, and in the spirit of mutual respect, peaceful coexistence and win-win cooperation"
- Earlier, Foreign Ministry spox Lin Jian said on the emerging trade war that "China will take necessary measures to resolutely safeguard its lawful rights and interests. If the United States ignores the interests of the two countries and the international community and insists on fighting tariff wars and trade wars, China will surely fight till the end,"
BUNDS: German 5s/30s finds resistance at the 2021 high
Apr-09 07:33
- Some Steepening unwind after Bund and the longer end Buxl recovered from their earlier lows.
- Nonetheless, the German 2s/10s managed to print its Steepest level since December 2018 at 94.033, while the German 5s/30s has found some resistance just short of 97.395, the 2021 high, printed a 96.448 high.
GILTS: Aggressive Twist Steepening
Apr-09 07:25
Gilts sell off, adjusting to the overnight move in Tsys.
- Futures break yesterday’s low, basing at 91.08, before a recovery to 91.30.
- Support at the Mar 28 low (91.03) was untested. That level protects the Mar 27 base & key support (90.55).
- Yields 9bp lower to 15bp higher, aggressive curve steepening seen.
- 10s30s is set for the first close above 80bp since August ’16, while 2s30s is on track for the steepest close since ’17.
- Flattener plays in the former were a preferred position into the Spring Statement, given expectations surrounding a shortening of WAM. Exiting of related legacy positions could be factoring into today’s steepening.
- GBP4.5bln of 4.375% Mar-30 gilt supply is due today.
- MPC member Lombardelli didn’t provide much in the way of market-pertinent commentary.
- A reminder that BoE’s Breeden will speak at an MNI Connect event on Thursday, covering “UK economic and financial stability prospects."
