The FOMC minutes appeared to indicate that the Fed was on course to raise rates in June, but 10y US Treasury yields fell below 3% in reaction, suggesting a market interpretation that any subsequent hikes would be gradual.
Focus remains on Italy as BTP spreads resumed their underperformance. 5 Star’s Giuseppe Conte accepted the task of forming a coalition government offered by President Mattarella. Government composition talks will continue for the next few days at the end of which PM-in-waiting Conte will report to the President
A government between 5 Star and Lega seems likely at this stage; what is less clear is whether such a government would be able to deliver on election pledges that, according to our estimates, would cost about €100bn per year.
Weaker than expected Euro Area PMIs provided little reason for a retracement in EURUSD yesterday as we traded to fresh YTD lows 1.1676 (Bloomberg). ECB minutes will be watched today although may not contain any materially new information.
Slightly softer than expected UK inflation put pressure on Sterling yesterday and sent GBPUSD to fresh lows trading down to 1.3312 (Bloomberg) as the market continues to pare back rate hike expectations.
Today attention turns to UK retail sales, we expect UK retail sales to grow 0.9% m/m vs 1.1% m/m consensus. While retail sales should recover from weather-related weakness in the March report, we expect the underlying structural weakness to continue.
USDTRY fell sharply after the CBT held an extraordinary rate meeting and hiked the Late Liquidity Window (LLW) rate by 300bp, to 16.5%. The behavior of TRY and global sentiment will be determinants of potential CBT policy action at the 7 June MPC meeting.
Today we expect the SARB to keep South African rates on hold. The SARB will likely sound hawkish, which could stabilize the ZAR somewhat, while further ZAR depreciation would likely see markets price some likelihood of a hike this year.