Markets
ECB governors en masse used the opportunity to speak again after yesterday’s ECB meeting passed by. We kick off with Wunsch. His speeches in the past very often foretold monetary policy. Case in point: he was the first to put a deposit rate of 3% or more in the market when it stood at no more than 0.75%. So when the Belgian governor speaks, we listen. Wunsch today said that rate hikes may have to continue beyond September if core inflation keeps at 5% in coming months. That would imply a deposit rate of at least 4.25%. He floated the 4%+ idea already in February: “Rates are clearly above 4% in the UK and the U.S.; that would also be a reference for me. Why would we stay at 3% if we have more or less similar core numbers?” But the regional bank crisis erupted in the US shortly after, putting the idea temporarily on the shelf. Buba’s Nagel this morning said there’s still a long way to reach the inflation target, adding that the ECB may need to keep raising rates after the summer break. Austria’s Holzmann sided with his German colleague. Slovenia’s Vasle argues for further gradual tightening but he and Lithuania’s Simkus wouldn’t commit to something beyond July for now. French governor and real buzz kill Villeroy jumped in the debate a bit later. He urged against premature conclusions about the policy calendar and the terminal rate, a view shared by Portugal’s Centeno. The slew of comments had only a marginal impact on peak rate pricing though. German yields even lose a few bps (0.3-2.5 bps) for the day. The 2-y easily retains yesterday’s push beyond 3% but the 10-y once again struggled near the 2.55% resistance area. US Treasuries underperform vs Bunds. Yields recuperate more than 9.1 bps at the front, longer maturities add 2.5-5.2 bps. The move is partially inspired by Fed’s Waller. The governor does not “support altering the stance of monetary policy over worries of ineffectual management at a few banks” and said “it’s not clear that recent banking strains will lead to significantly tighter lending conditions in the US”. We can’t help but read it as a critique towards the Fed (not so) unanimous decision to halt the tightening cycle this Wednesday. One final quote: “Let me state unequivocally: The Fed’s job is to use monetary policy to achieve its dual mandate, and right now that means raising rates to fight inflation.” Yen weakness catches the eye on FX markets. The Japanese currency extends losses after the BoJ once again stood pat this morning even as inflationary pressures are strong and building. USD/JPY is set for the highest close since November 22 around 141.26. EUR/JPY surges towards 154.67, compared this week’s open of 149.85. The DXY and EUR/USD stabilize near yesterday’s closing levels in the low 102 and 1.095 area respectively. Sterling tries to push beyond this week’s/YtD highs against the euro. EUR/GBP is headed towards a pivotal next week (UK CPI, BoE) at around 0.853. Equities are in a good place. The EuroStoxx50 (+0.87%) for a third time this quarter attacks the YtD/cycle high.
News & Views
The National Bank of Poland’s May core inflation measure slowed to 0.4% M/M and 11.5% Y/Y, down from 1.2% M/M and 12.2% Y/Y in April. End May, the Polish statistical office reported headline inflation at 0.0% M/M and 13.0% Y/Y. CPI ex food and energy eased to 0.4% M/M and 11.5% Y/Y. CPI ex administered prices was unchanged compared to April, with the Y/Y figure slowing from 14.0% to 12.1%. Especially the decline in the monthly dynamics should give some hope that disinflation is finally gaining traction. NBP MPC members so far were cautious to open the debate on a first rate cut. In comments after the June policy decision (6.75% unchanged), governor Glapinski suggested the debate on rate cuts may start when CPI drops below 10% and when analysis indicates that the decline might continue in the coming quarters. Money markets currently are positioned for a first cautious rate cut in Q4. The zloty earlier this month touched the strongest level against the euro since end 2020 at 4.43 but now shows signs of topping out. EUR/PLN currently trades near 4.465.
UK citizens’ inflation expectations eased compared to February, the Bank of England’s quarterly survey showed. Respondents expect inflation in the coming year at 3.5%, down from 3.9% even as current inflation was still assessed to be higher at 9.6%, up from 9.2%. Asked about longer-term expectations (5-y), the median answer stayed unchanged at 3.0%. 57% of respondents still expect rates to rise further over the next 12 months. When asked whether the BoE is doing its job to set interest rates to control inflation, the net satisfaction balance declined from -4 to -13, a new record low. The survey is important input to the BoE’s policy meeting next week.
