Markets
Core bonds ended last week on a solid footing. German Bunds outperformed US Treasuries in more of a one-off reset after very weak French PMI’s. German yields fell by 10 bps to 15 bps with the belly of the curve outperforming the wings. US Treasuries lost 5 to 6 bps across the curve. Risk sentiment took a hit with main European and US equity indices losing 0.5% to 1%. The dollar profited in this environment, with the trade-weighted (DXY) index closing at 103.16 from a start at 102.38. EUR/USD set an intraday low at 1.0845, but the single currency turned more resilient in the end, managing a close at 1.0894 (from 1.0956). EUR/GBP followed the intraday trading pattern of EUR/USD with an intraday low at 0.8536 and a close at 0.8567.
The Russian uprising dominated headlines this weekend. The mutiny of the Wagner Group already ended following a deal with Moscow, but the episode highlights Russian instability and suggests signs of weakness. Asian trading shows little impact of insurrection though. Today’s eco calendar is rather light, giving little guidance for trading. Friday’s market direction is the likely way, if any, to follow. June German Ifo Business Climate is the sole data point, but is normally a reflection of the earlier published PMI. The German composite PMI unexpectedly declined from 53.9 to 50.8 with the manufacturing recession deepening (41 from 43.2) and with the services sector losing momentum (54.1 from 57.2). The US Treasury starts its end-of-month refinancing operation with a $42bn 2-yr Note auction. We expect it to go well given the yield increase of the past month even as the US Treasury is in full replenishing mode following the debt ceiling deal. The ECB’s annual forum starts in Sintra, which will result in an avalanche of central bank speakers. A panel discussion with ECB Lagarde, Fed Powell, BoE Bailey and BoJ Ueda on Wednesday is the key event. European and Japanese inflation numbers on Thursday and on Friday are this week’s other key events.
News Headlines
Rating agency Fitch on Friday affirmed Hungary’s BBB rating with a negative outlook. The country’s ratings are supported by strong structural indicators relative to BBB peers, economic growth fueled by investments and solid net FDI inflows. These positives are balanced against a high public debt, unorthodox fiscal and monetary policy moves and worsening governance indicators. The negative outlook reflects risks around the credibility of macroeconomic policy. Fitch mentions, amongst others, the cost of energy support measures, the regulatory burden of windfall taxes and high inflation despite (ineffective) price caps. The external position improved substantially due to lower cost of energy imports, but energy dependence on Russia is still seen an important risk. Fitch expects Hungary to reach an agreement European Union on EU funds the but timing and size remain uncertain. The agency sees Hungarian growth stagnating in 2023 as domestic demand will contract. Growth in 2024/25 is expected to average 3% again. Inflation is expected to ease to 8-10% by the end of this year and to average 5.1% next year and 3.1% in 2025. The budget deficit is expected to narrow to 4.1% this year and 2.9% in 2024.
Minutes of the June Bank of Japan meeting showed one policy member calling for an early revision of Yield Curve Control (YCC). According to the member, the BOJ should maintain its overall framework of monetary easing, but a revision to the treatment of YCC should be discussed at an early stage as the cost of YCC is high taking into account factors as preventing sharp fluctuations in interest rates in the future phase of an exit from the current policy, in terms of improvement in market functioning, and enabling smoother dialogue with market participants. While representing a minority within the MPC, markets will look out for more signals/comments on a potential tweak in the YCC in the run-up to the next BoJ meeting on July 28. In the meantime, persistent yen weakness again caused Japan’s vice finance minister for international affairs, Masato Kanda, to warn on rapid and one-sided moves in the yen. With regard to potential interventions, Kanda said that all options are available and the government isn’t ruling out any option. Finance Minister Suzuki said authorities will respond appropriate to excessive FX moves.
