GERMANY: FT-Berlin Seeks To Build US Weaponry In Effort To Boost Industry

• Front-end German yields are on the rise this morning, confirming their vulnerability to an upward correction near the expensive end of their recent range below 2.60% amid hardening ECB rhetoric and the ongoing absence of a US/Iran agreement.
• At ~15bps below mid-May levels, this morning’s upward pressure emphasizes the fragile nature of recent bond gains, particularly after market attention pivoted toward a potential Washington-Tehran peace deal late last week.
• Indeed, the trend structure in Schatz futures remains structurally bearish, making recent upside price action appear purely corrective. The immediate bear trigger to watch lies at 105.450 (the March 23 low); clearance of this level would officially resume the broader downtrend.
• This hawkish momentum matches central bank positioning with comments from the likes of Isabel Schnabel stating that the inflationary impact of the war can no longer be overlooked. However, scope for a sustained push higher in yields beyond 2.75% over the coming weeks may be contained by ECB officials' growing concerns about the growth outlook, as reported in our Policy Team's sources piece last week.

• This morning’s data showed that while three-year ECB inflation expectations eased marginally to 2.9% in April, they remain structurally elevated after spiking to 3.00% in March. This sticky data reinforces market views that the ECB will need to hike rates at least twice this year. OIS swaps are assigning an over 90% chance that the ECB will raise rates at next week's meeting, with a total of ~60bps now priced in by year-end.

  

• In the equity space, the primary trend in S&P E-Minis is unchanged, it remains bullish and a positive start to this week’s session reinforces bullish conditions. The break higher maintains the bullish price sequence of higher highs and higher lows. Sights are on 7635.25, a 3.500 projection of the Apr 23 - 28 - 29 price swing. Initial firm support lies at 7421.24, the 20-day EMA.
• A bullish theme in EUROSTOXX 50 futures  remains intact. Trend signals continue to highlight a dominant uptrend highlighted by moving average studies that are in a bull-mode position.Scope is seen for a climb towards 6200.00 next. Initial firm support lies at 5962.65, the 20-day EMA.

German headline April real retail sales declined slightly in April. They performed a little better than feared, but there were signs of a pullback in discretionary spending amidst higher pump prices. Gas station sales show signs of postponed refuelling ahead of the fuel discount announced before its May 1 start date. 

• Retail sales volumes slipped -0.3% M/M (cons -0.5%) in April on a seasonally and calendar adjusted basis after a heavily upward revised but still negative -0.3% M/M in March (already known, attributed to late-filed business reports in the pharmacy sector).
• Gas station sales were a key driver, with volumes sliding -4.0% M/M after -2.3% M/M as implied prices rose another 3.1% M/M after a particularly strong 11.6% M/M in March. The larger drop in volumes on the month could be a delayed impact from the previously sharp increase in prices and/or postponement of sales awaiting the fuel discount. This policy, announced mid-April and approved by parliament on Apr 24, was worth 17 cents per litre for two months from May 1 with companies then choosing how much of the saving to pass on to pump prices.  
• Ex-gas sales meanwhile slipped -0.2% M/M for a third consecutive tepid month (averaging -0.1% M/M Feb-Apr) after some volatility at the turn of the year. More discretionary categories looked weak in April in signs of higher fuel prices biting, with this breakdown from Destatis: "Sales in the food retail sector increased by 3.2% in real terms [...] In the non-food retail sector, sales declined by 2.2% in real terms [...] In online and mail-order retail, sales fell by 4.7% in real terms"
• A word of warning looking at specific categories vs overall retail sales: "Due to the methodology used for calendar and seasonal adjustment, all time series are currently adjusted separately. Therefore, it is possible that the change rates of the sub-items do not equal the change rate of the aggregate".
• Taking a step back, overall retail sales volumes were -0.3% Y/Y in April after -0.2% Y/Y in March, the first negative months since mid-2024. Ex-gas station sales were marginally better but still at 0.0% Y/Y after -0.2% Y/Y in March, its weakest reading since Jun 2024. This continued weakness comes after German retail activity had recently started to underperform its Eurozone counterparts, with overall Eurozone retail sales up 1.1% Y/Y back in March (April retail sales due Jun 4).
• Crudely implied retail prices were 1.8% Y/Y higher in April, with 20.1% Y/Y for gas stations and 1.4% Y/Y for ex-gas.