Sunset Market Commentary

Markets

UK May Inflation data and Fed Powell’s semi-annual Congressional testimony before the House Financial Services Committee were key today. Powell’s testimony still takes place after finishing this report, but the text of his statement is already published (cf infra). UK May inflation data awakened markets. Headline inflation rose 0.7% M/M holding the Y/Y measure unchanged at 8.7% (expected to slow to 8.4%). Core inflation also maintained an elevated monthly pace of 0.8% M/M raising the Y/Y reading from 6.8% to 7.1%, the highest level since March 1992. Looking at the monthly dynamics, price rises again were broad-based with clothing and footwear (1.3% M/M), restaurants and hotels (1.0%), communication (0.9%) and recreation (0.7%) catching the eye. Both goods inflation (0.6%M/M) and services (0.7% M/M) remained at elevated levels. Coming on the back of a very strong labour market report last week, markets couldn’t but conclude that the Bank of England is far ‘behind’ the curve in fulfilling its inflation mandate. Especially short-term UK Gits jumped, more than reversing yesterday’s correction. The 2-y yield again trades north of 5%, but off intraday peak levels. UK yields currently add between 13 bps (2-y) and 7.5 bps (30-y). The focus now evidently turns to tomorrow’s BoE meeting. Money markets see a 30% chance of a 50 bps rate hike tomorrow. A cumulative 75 bps rise is discounted for the June and August meetings combined. The cycle rate peak rate is now seen close to 6% toward the turn of the year. From a market stability point of view it’s difficult to say what will be the best/least worst BoE action. The inflation credibility point of view evidently calls for a 50 bps step. However, markets can see it as the BoE of England panicking on the deviation from its expected inflation path, with at the same time growing recessionary risks further out in time. On the other hand, a 25 bps hike might trigger additional selling pressure for the long end of the curve. So, whatever action the BoE takes, the consequences for UK asset markets remain highly uncertain. This high degree of uncertainty probably also explains the pound’s intra-day price pattern. After briefly dropping to the 0.8530 area immediately after the release, EUR/GBP rebounded back to 0.86 area (currently 0.8585).

From the BoE to Fed Powell’s prepared text of his testimony before the House. Understandably his assessment is very much in line with last week’s post-FOMC communication. ‘Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go’. Even as the Fed paused its hiking cycle last week, ‘Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year’. This morning, US and German yields spiked about 3-5 bps higher upon the UK CPI release, but the spill-over initially evaporated. The reaction of (US) bond markets to the Powell statement remains modest, but yields again took the path north. US yields currently add between 5.0 bps (2-y) and 3.5 bps (30-y). The German yield curve also inverts slightly further. (2-y +2 bps, 30-y unchanged). Equities continue this week’s (still gradual) correction (Eurostoxx -0.4%; S&P -0.35 %). The dollar gains modestly (DXY 102.6) with the yen again under pressure (USD/JPY revisiting the 142 big figure). EUR/USD is going nowhere (1.092).

News & Views

Belgian consumer confidence stabilized at -9 in June (vs long term average just below -6). Following last month’s slump (-6 from -9), consumers have revised their expectations of the general economic outlook upwards, returning to April’s level (-15 from -20). Concerns about rising unemployment over the next twelve months have also waned somewhat (17 from 18). On a personal level, households expressed slightly more apprehension and have revised downwards both their expectations of their financial situation (-5 from -3) and their savings intentions (1 from 2). Belgian June business confidence will be published on Friday with consensus expecting a deterioration from -9.2 to -10.5.