Markets
Markets yesterday still showed highly sensitive to any headline on inflation. Even the CPI release from the German state of North-Rhine Westphalia triggered a nervous start on (European) bond markets. The lower than expected inflation print (-0.1% M/M) later was conformed in the overall German figure (HICP -0.1% M/M, 8.2% Y/Y in May, from 8.7% in April). The slowdown was at least partially due to a one-off reduction in the cost of public transport. Later, Spanish HICP (10% Y/Y) and Belgian (9.65 % Y/Y) CPI showed no sign of easing at all. European yields temporarily reversed the initial decline. However, markets one way or another still pondered the idea that inflation might be nearing a peak momentum. Financial inflation expectations both in EMU and the US eased further. At a panel debate, Fed’s Powell, ECB Lagarde and BoE governor Bailey all reiterated that preventing a de-anchoring of inflation expectations should be avoided at any price. Investors apparently conclude that the ‘inevitable’ slowdown in growth might allow CB’s to slow the pace of hiking in 2023. A further topping out in (some) commodities also gives some comfort. Whatever the driver, core bonds rebounded. The belly of the curve outperformed the wings. The US 2-y eased 7.1 bps. Yields in the 5/10-y sector declined 9/8 bps. Similar reaction in Bunds the 5y outperforming (-15 bps) despite mixed regional inflation data. The euro initially tried to resist the decline in EMU yields, but broader USD strength finally pushed EUR/USD off a cliff (close at 1.0442 VS open 1.052). DXY finished north of 105. The Hawkish Sintra Powell comments pushed USD/JPY for a multi-year high test of the 137-level. Sterling hardly gained against a soft euro (close EUR/GBP¨0.8616). The Swiss franc strengthened below parity against the euro (close EUR/CHF 0.997). US equities showed no clear directional trend (S&P -0.07%).Risk sentiment in Asia stays fragile with China outperforming on better PMI’s (cf infra). The dollar eases (DXY 104.98; USD/JPY 136.4; EUR/USD 1.045). Later today, investors will keep a close eye at the US PCE deflators (May). A further substantial rise is expected (headline 0.7% M/M and 6.4% Y/Y). Or will markets give more weight to a potentially softer core reading (0.4% M/M expected)? The Chicago PMI, US jobless claims might give some further insights in the growth part of the equation. OPEC+ meets in Vienna, but no amendment of the approved production hike for August looks to be on the cards. The Riksbank is expected to hike rates by 50 bp today. On interest rate markets, recent consolidation pattern looks firmly in pace with the topside in yields capped for now as investors look out for the impact of (anticipated and already implemented) policy tightening and slower growth on inflation. 3.00% and 2.13% are first intermediate support of the US 10-y and the 10-y EMU swap respectively. In EUR/USD even the 1.0600/27 area proved a too high hurdle for now. 1.06/1.0341 serves as the ST trading range short-term.
News Headlines
Senate Democrats are working on shrinking the amount of tax increases planned in president Biden’s economic package. The $2.2tn deal approved by the House last year would be paid for by $1.5tn in tax increases but met fierce resistance from Democratic Senator Manchin. His vote is crucial in the 50-50 split Senate to get Biden’s Build Back Better deal through. Manchin and Senate Majority leader Schumer are close to agreeing that the overall tax increase amount would be roughly $1tn and that half of that needs to go to deficit reduction over 10 years. Time is ticking for Biden and the Democrats. By the end of September, the budget resolution that allows them to pass the bill with a simple majority, expires. Many believe the bill probably needs approval already next month, before August recess.
