EM LATAM CREDIT: Colombia: Fitch Reacts - Positive
Jun-18 16:46
(COLOM; Baa2neg/BB+neg/BB+neg)
"Colombia’s Revised Deficit Targets Heighten Fiscal Uncertainty" - Fitch
Fitch said that the deterioration in the fiscal situation was already "central to their revision to negative outlook in March 2025".
The recent medium term fiscal framework presented by the government last week was effectively already factored in to their ratings so it doesn't seem like they will downgrade further in the near term which we take away as positive relative to our expectations.
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INFLATION: Expectations Anchored In US & EU, But With Opposing Forces [2/2]
May-19 16:23
- Much of the EU and German fiscal push over the past two and a half months has been in defense spending and infrastructure investment with longer-term horizons.
- There have been increasing question marks over the extent to which this fiscal support will be inflationary, with 5Y5Y EUR CPI swaps holding most of the reversal from their initial spike higher on the early March announcements. Indeed, US-EU inflation swap differentials have at +38bps have fully reversed the initial drop to as low as +17bps.
INFLATION: Expectations Anchored In US & EU, But With Opposing Forces [1/2]
May-19 16:22
- US market-based inflation expectations remain a story of one where short-term elevated expectations on the back of US tariff policy aren’t spilling over to longer duration measures, even when comparing just 1Y vs 1Y1Y metrics (left chart).
- 1Y inflation swaps have been helped lower by last week’s de-escalation in China-US trade policy, and at 3.24% today are below the 3.25% seen the day before Apr 2 Liberation Day announcements. They are however still elevated by the standards of the past two and a half years having pushed higher ahead of reciprocal tariffs.
- In contrast, the 1Y1Y inflation swap of 2.525% is back at Apr 1 levels. That’s high compared to pre-pandemic levels averaging closer to 2% but it’s very much in line with recent averages away from the 2021-22 peak of the post-pandemic inflation episode.
- With FOMC participants frequently talking on the need to keep inflation expectations anchored, this should continue to please them.
- Looking cross country, the opposite is true in Europe where negative near-term growth implications of US trade policy are deemed most acute.
- 1Y EUR inflation swaps at 1.43% are ~25bp lower than pre-Liberation Day levels and ~50bp lower than late March levels (right chart). The 1Y1Y at 1.75% meanwhile is 12bp and 14bp lower respectively.
FOREX: USD Dip Stabilises, RBA Policy Statement Key
May-19 16:16
- Headed through the European close, the greenback is holding the bulk of the day's losses having backtracked around 0.5% on the back of the Moody's downgrade late on Friday. Through APAC hours, JPY and CHF were the original outperformers, but a notable step higher in EGB/Gilt yields, a general steepening of the curve hindered progress and outperformance switched to EUR and GBP into the NY crossover.
- The RBA rate decision is a focus Tuesday. The Bank are expected to cut rates a further 25bps to 3.85%, but AUD/USD's range trade since the beginning of the month signals a market with little concern over easier policy. The policy statement will be watched carefully as markets priced a further 2 x 25bps cuts beyond assumed easing tomorrow, despite tariff uncertainty and the prospect of further stimulus from China.
- Canadian CPI for April is due Tuesday, ahead of which USD/CAD remains in a consolidation pattern after correcting higher to trade either side of 1.40. 1.4022 marks notable resistance ahead, the 200-dma, above which markets trade the best levels since mid-April. The 50-dma will imminently form a death cross, indicating strong short-term downward momentum.
- GBP/USD traded as high as 1.3404 through the initial phase of USD sales this morning, but has backtracked to clock only a ~75 pip gain on the day. CPI stats on Wednesday should prove pivotal here as the BoE's MPC remain divided on near-term rates strategy without hard data on wages through April.
