Markets
Spotlights on Europe today. August CPI inflation beat consensus, rising by 0.4% M/M and 3% Y/Y (from 2.2% vs 2.7% consensus). This matches the peak levels from end 2011 with EMU inflation only exceeding this level in 2008. Underlying core EMU inflation surged from 0.7% Y/Y to 1.6% Y/Y, the strongest reading since 2012. Volatile components are responsible for the lion share of the inflation increase, but service price inflation and non-energy industrial goods are on the rise as well as economies reopens, but still face prolonged supply bottle necks. Europe is facing a similar problem as the US, where the definition of peak inflation and temporary higher inflation have been rewritten for months. European inflation will increase further until the end of the year, but will drop back early next year as base effects and Germany’s tax reduction unwind. The new equilibrium level could be higher than earlier anticipated though. Short term inflationary pressures will be visible in next week’s fresh ECB inflation forecasts (higher), but Lagarde (as Fed chair Powell) will still stress the need to look though temporary higher prices. Apart from the inflation argument, it today became clear that minds in Frankfurt are gradually shifting towards becoming slightly less accommodative. Heavyweight ECB Villeroy this morning pointed to easier financial conditions over Summer. Back in March & June, the ECB justified and increased weekly amount of PEPP purchase by referring to an unwarranted tightening in those same financial conditions. All else equal, this suggests that the debate on slowing weekly purchases will be part of the agenda. Especially with the March 2022 PEPP shelf date rapidly approaching. Framing the transition period after March 2022 – with APP partly taking over PEPP – will probably something for the October or December meeting. ECB Holzman backed Villeroy’s covered hint by explicitly mentioning that the ECB is in the position to think about reducing pandemic aid. He has inflation risks on his mind and backs a Q4 slowdown of net PEPP-purchases.
We argued before that following a one-sided, USD-focused Summer, there was/is room for European market moves given very low expectations. Today served as a point in case. EUR/USD took out 1.1805 intermediate resistance to test the incoming downtrend line (connecting June post Fed, July and now August tops) in the high 1.1840 zone. EUR/GBP tried to take out the 0.86 big figure for the first time since mid-July. German Bunds underperform US Treasuries. German yields add 1.7 bps (2-yr) to 4.5 bps (10-yr) across the curve. The Italian 10-yr yield spread adds 3 bps. US yields trade 0.4 bps to 1 bp higher in a daily perspective. European stock markets cede on average 0.5%.
News Headlines
Polish August preliminary inflation unexpectedly jumped 0.2% M/M to be up 5.4% Y/Y (from 5% vs 5.1% consensus). Yearly price growth is now at the highest level in more than 20-years. Price of Electricity & gas rose 0.8% M/M and 6.1% Y/Y. Fuels for personal transport jumped 1.8% M/M to be up 28% Y/Y. The majority of MPC members indicated they don’t aim to raise the policy rate anytime soon. A motion to raise the policy rate by 0.15% was rejected at the June and July policy meetings. NBP assessed that the rise in inflation was caused by the reopening of the economy and due to factors that were beyond control of monetary policy. Even so, the zloty jumped from EUR/PLN 4.56 to trade near 4.5375 as markets see a growing chance that the NBP will have to change tactics.
Czech growth accelerate to 1% Q/Q in Q2 (from 0.6% Q/Q), slightly below the CNB forecast. Growth was mainly supported by domestic demand. Household consumption rose 6.5% Q/Q after the spring easing of restrictions and by the release of forced savings. Growth in gross capital formation (4.3% Q/Q) mainly reflects a strong contribution of change in inventories, but the CNB also sees a recovery in investment. The Q2 export performance (0.6% Q/Q) was dampened by shortages of parts in industrial production and forced stockpiling of unfinished products. Import growth thus outpaced export growth. The CZK temporary gained early this morning testing sub EUR/CZK 25.50.
