Markets
The first ECB governors came to speech in the wake of yesterday’s policy meeting. Muller kicked off by saying that previous rate increases are having an impact and that next decisions are no longer obvious. Vasle and Simkus joined by adding that September could either be a hike or a pause, depending on the data. Kazimir struck the most hawkish cord. Core inflation remains too high and risks are still clearly tilted to the upside, he said. He does acknowledge that the latest hike to 3.75% brought the ECB close to the peak. Germany’s Nagel also referred to stubborn core inflation but kept an open mind on whether to hike or pause in September. France’s Villeroy repeated the “data dependence” code the ECB now lives by. Both him and Nagel stressed the need for keeping rates high for long enough. Acting on the quotes proved tricky with a slew of European data scheduled for release though. Several euro area member states published July inflation numbers, including Spain (2.1%, up from 1.6% with core rising too), Germany (6.5% from 6.8%), France (5% from 5.3%) and Belgium (4.14% from 4.15%). Data from the first printed higher than expected while our neighbours in the south and east missed the bar by the tiniest margin. The latter two also published a first Q2 growth estimate. France crushed the bar by growing a nice 0.5% q/q (0.9% y/y). Germany stagnated but saw its Q1 figure revised upwards from -0.3% to -0.1%. Belgium’s economy grew a meagre 0.2%. Services single-handedly support growth with the industry still teetering. As if a clean markets response wasn’t already difficult enough, US data came interfering too. The all-important Employment Cost Index (+1% q/q in Q2) rose less than the 1.1% consensus. June income and spending data were about in line with expectations, considering the upward revisions to the previous month. PCE deflators were spot on (0.2% m/m, 3% y/y) with the core gauge slightly less than anticipated in the yearly print (0.2% m/m, 4.1% y/y).
The data in general confirm markets’ current belief that tightening is close to an end and a soft landing is actually on the table. Core bonds in general gain with USTs outperforming Bunds. The latter gapped significantly lower at the open, catching up with a BoJ-inspired move in the US late-yesterday. From there on, however, yield gains quickly evaporated. Changes vary between -6 bps at the front and +2.7 bps at the longest tenor. US yields move from -3.9 bps to +0.8 bps in similar steepening/less inversion of the curve. EUR/USD is struggling for the 1.10 big figure going into the weekend. Sterling is well bid. EUR/GBP is easing towards 0.855. Unlike the euro and USD, the pound is the only one having clear(est) sight on further tightening, even if already accounting for next week’s BoE (25 or 50 bps?) rate hike. European equities wiped out earlier minor losses to trade flat and WS opens >1% higher (Nasdaq).
News & Views
Swedish growth contracted by 1.5% in Q2 putting the level of activity 2.4% lower y/y. It follows a 0.6 % Q/Q rise in Q1. Monthly retail sales in June also declined 0.3% M/M to be 4.4% y/y. June labour market data showed a sizeable increase in the labour force participation. The number of people in the labour force rose 103k compared to the same month last year to 5.940 mln. The relative labour force participation rate amounted to 78.5%, an increase by 1.1 ppts. The unemployment rate rose to 7.9% from 7.2%. However, due the rise in the labour force the higher unemployment rate mirrored both a higher number of unemployed and employed people. Soft activity data won’t make it easier for the Riksbank to convincingly execute further tightening as it still has to cope with high inflation (CPIF 6.4% Y/Y in June). The Riksbank end June raised its policy rate by 25 bps points to 3.75%. The krone early this month rebounded from an all-time low against the euro at EUR/SEK 11.95. The pair currently hovers near 11.55.
The Swiss KOF Economic Barometer improved slightly in July from 90.7 to 92.2 after three consecutive monthly declines. However the economic environment in the Swiss economy is still labeled as difficult. All indicator bundles except those for consumption continue to point to a rather below-average development, but they moved in different directions in July. The outlook for services, financial and insurance services as well as for foreign demand and domestic consumption has brightened somewhat. On the other hand, the outlook for construction activity and for manufacturing, whose outlook is particularly gloomy, have clouded over. The Swiss franc was well bid in July, but today some modest correction kicked in. At EUR/CHF 0.956, the franc still trades strong compared to levels near 0.98 a month ago.
