MNI US OPEN - Spreads Extend Drive Tighter

NEWS:

ECB (BBG): ECB’s Knot Sees Several Bigger Hikes Possible If Inflation Worse
European Central Bank Governing Council member Klaas Knot said several half-point increases in interest rates are possible if inflation worsens. But speaking in a radio interview, the Dutch central bank chief said cumulative moves are unlikely to reach 200 basis point by early next year.

EU (MNI): PM Spox: Hungary Will Oppose Global Min Corp Tax at EU Meeting
The head of Hungarian PM Viktor Orban's office, Gergely Gulys, has confirmed that Hungary will oppose the EU's planned directive on establishing a minimum corporate tax rate of 15% to come in line with OECD proposals to make the rate a minimum across the organisation. EU finance minister are due to vote on the issue at a ECOFIN meeting today,but the vote may now be pushed back. While the Hungarian gov't states that the opposition is due to the economic impact on Hungary, there is the potential for an ulterior motive at play.

BOJ (BBG): Bank of Japan Governor Haruhiko Kuroda held firm with rock-bottom interest rates, defying an intensifying global wave of central bank tightening and concentrated market pressure on the yen and government bonds. The central bank kept its policy settings for yield curve control and asset purchases, according to a statement Friday, in line with the forecasts of almost all surveyed economists. In a rare move, the bank added a reference to foreign exchange rates to its list of risks for the first time since 2012, following the yen’s rapid weakening to a 24-year low earlier this week.

JAPAN (MNI): BOJ's Kuroda Makes It Clear On Yen, Yields
Bank of Japan Governor Haruhiko Kuroda on Friday, reversing his previous remarks, voiced concern over the impact of the rapid yen's fall on economy and prices, and said the recent movements are undesirable. Kuroda also ruled out the view that the BOJ would change or tweak monetary policy to target foreign exchange rates. He did not elaborate on how the BOJ would cope with a weak yen with monetary policy.

CHINA (MNI): PBOC In Wait-And-Watch Mode On Key Rates
China's key reference lending rate is expected to remain unchanged this coming Monday as the People's Bank of China refrains from further divergence from U.S. monetary policy that could encourage more capital outflows and pressure the yuan, market analysts said. The June Loan Prime Rate (LPR), to be released by the PBOC on June 20 based on quotes from 18 banks, is likely to remain at 3.7% over one year rate and 4.45% for five years and above.

DATA

MNI BRIEF: EZ Inflation At 8.1%, Underlines ECB's Challenge
Inflation in the eurozone was confirmed at 8.1% in May, with a variation in levels across the region, according to Eurostat. Prices rose just 5.8% y/y in France and Malta, but rose 20.1% in Estonia and 18.5% in Lithuania.

Core inflation rose 3.8% y/y, accelerating from 3.5% in April.
The data underlines the dilemma facing the European Central Bank -- the need to address rising prices but remain mindful of the different impacts across the region. With an intended hike of 25 bps in July, followed by a potential 50 bps hike in September, policymakers have at least signalled intent to embark on a tightening cycle. Further work towards a tool to fight fragmentation issues across EZ bond markets, as this week's ad hoc meeting of the Governing Council suggested, will give the ECB even greater flexibility in its fight against inflation.

FOREX: JPY Backtracks as BoJ Commit to Policy Stance

• Following the BoJ rate decision overnight, JPY is the weakest currency in G10 as the BoJ doubled down on their easy policy stance, effectively allowing markets to resume the selling pressure on the JPY.
  
• Risk sentiment remains shaky despite the bounce off the lows for global equity futures - as a result AUD continues to slide, putting AUD/USD either side of the $0.7000 handle.
• The greenback trades more favourably, with the USD Index partly reversing the dollar downtick seen Thursday - but the week's best levels are still a way away for markets at these levels.
• Focus turns to the US industrial production release for May as well as an appearance from Fed chair Powell after this week's tumultuous rate decision. He gives welcoming remarks at a dollar conference so may not directly reference policy. Following yesterday's rate decision, BoE's Pill also speaks at a workshop on household finance.

EGB SUMMARY: Lagarde drives spreads tighter

• Another volatile start for Govies and Rate markets.
• Bund trades in a 224 ticks range, and nearly reached level where it was trading yesterday on the cash open, at circa 145.01, printed a 144.80 high.
• Bund fell all the way back down to 142.67, and now at 144.50 at the time of typing.
• Most notable flows is in peripheral spread, driven by ECB Lagarde's comment last night, telling Ministers that the ECB expects to put limits on Bond spreads.
• In turn, Greece and Italy trade 21.8 and 13.4bps tighter respectively versus the German 10yr, with BTP falling all the way down to 188.4bps.
• Gilt initially outperformed and pushed the Gilt/Bund spread to its tightest level since September 2020.
• But the pull back higher in Bund led by BTP, has brought back the Gilt/Bund spread 2.4bps wider now.
• It was a decent overnight session for Treasuries, with Tnotes trading 220k lots pre European cash open, and now over 400k lots traded. Treasuries are also in Green territory taken their cues from Europe, and some of the divergence has brought back the Tnote/Bund spread wider, by 8.4bps, after the spread tested the tightest level since December 2020 yesterday.
• Looking ahead, there are tier data for the session, focus will be on Equity expiry, expect some volatility at 14.30BST/09.30ET.
• Remaining speakers are Fed Powell making welcoming remarks at Dollar Conference, and BoE Pill at a BoE workshop on household finance and housing.