Markets
The consumer confidence of the University of Michigan was he only market relevant data release on Friday, but it brought somewhat of a mixed message, especially for bond investors. Consumers’ assessment, both on current conditions (63.9 from 59.2) and on expectations (68.0 from 64.9) printed stronger than expected but inflation expectations for the year ahead unexpectedly softened from 4.2% to 3.3%. Yields whipsawed after the release, but there was no lasting directional impact. Plenty of mostly hawkish oriented policy makers were eager to give their view on the ECB strategy going forward. ECB’s Wunsch was most specific in its guidance as he said that ‘if core inflation keeps around 5.0% on a yearly basis in the coming months, then we will have to increase beyond September’. Assuming two additional hikes in July and September, this suggests that a cycle peak ECB deposit rate of 4.25% would be a real possibility. BuBa’s Nagel and Austria’s Holzmann were on the same line. Others including ECB Chair Lagarde were more reluctant to comment on what might happen beyond the clearly flagged July hike. German yields took a breather after last week’s upleg, easing between 0.3 bps (2-y) and 3.4 bps (30-y). The 2.55% level proves to be tough resistance for the German 10-y yield. US interest rate markets showed somewhat of a different picture as they had to adjust after a ‘too’ strong setback on the back of higher (weaker than expected) jobless claims on Thursday. US yields rebounded between 7.25 bps (2-y) and 1.5 bps (30-y). Even so, US 2 & 10-y yields also feel headwinds from resistance at respectively 4.8% and 3.85%. Real yields (10-y currently 1.54%) again nearing the cycle peak probably was factor slowing the US equity rally (Nasdaq -0.67%). At 4395, the EuroStoxx 50 (+0.68%) is only a whisker away from the cycle top. On FX markets, the dollar mostly kept Thursday’s post-claims/post-ECB losses. EUR/USD closed marginally lower at 1.0937. Sterling continues to profit from ‘comfortable’ interest rate support with EUR/GBP drifting further south in the 0.85 big figure (close 0.8532).
Today, the calendar is extremely thin. US markets are closed for the Juneteenth holiday. In the EMU there no important data. ECB’s Lane, Schnabel, Villeroy and Guindos will speak. We expect the downside both in US and EMU/German yields to remain well protected. After last week’s break higher, EUR/USD might develop a further buy-on-dips pattern. The cycle top at 1.1095 remains the key reference. Later this week, Fed Chair Powell’s testimony before Congress (Wednesday, Thursday) will be closely looked at. On Friday, the PMI’s will give a new update on the health of the economy in most majors countries. In the UK, the BoE on Wednesday still receives key inflation data before deciding on policy the next day. Aside from the BoE, also the Hungarian centrale bank (Tuesday), the Czech National bank (Wednesday) and the Swiss and Norwegian centrale bank (Thursday) will decide on policy.
News and views
The US Treasury in its semiannual report referring to 2022 included seven major economies on its monitoring list for currency practices. It did not, however, label any trading partner as an FX manipulator since none of them had met all three criteria. Even if it did, there are no immediate consequences other than holding talks to address the matter. The list is mainly to pressure those perceived to be artificially keeping their currency weak(er) to gain a competitive advantage. Countries being monitored today are China, South Korea, Germany, Malaysia, Singapore, Switzerland and Taiwan. Japan was dropped. The country in 2022 intervened a number of times but to strengthen the yen against a surging USD. Switzerland had exceeded one of the three criteria and the UST said it will continue a thorough analysis of the country until it no longer meets any of them.
Argentina is on the verge of defaulting once again as soon as the end this month. Some $2.7bn is due to the International Monetary Fund but Argentina’s FX reserves took another blow from a major drought that sunk soy and corn harvests. The country is set to hold talks with the IMF this week and hopes to bring forward more than $10bn in IMF disbursements scheduled for later this year. The government however is reluctant to agree with additional tough austerity measures with October general elections looming. Argentina’s economy is suffering under a whopping 114% inflation, hurting spending power and pushing people ever more in poverty.
