Sunset Market Commentary

Markets

European CPI numbers and Q2 GDP growth were the main (and only) dish for today. The economy expanded more-than-expected 0.3% in the previous quarter after stagnating in Q1. Compared to the same period last year, GDP is 0.6% larger. It’s only the flash reading, so changes may still take place. That said, the figure suggests the economy for the time being is weathering all sorts of headwinds rather well, including coming from the ECB’s aggressive tightening cycle and slowing growth abroad (US, China …). The upside surprise, amongst others, came after a whopping 3.3% q/q advance in Ireland and 0.5% q/q in France. Italy’s economy, on the other hand, unexpectedly contracted by 0.3%. Headline inflation, then, fell 0.1% m/m – as expected – to be up 5.3% y/y in July. It’s only a minor deceleration from the 5.5% in June. In addition, underlying price pressures remain stubborn as ever. Core inflation (ex. food and energy) came in at an unchanged 5.5%, defying expectations/hopes for even the smallest cooldown possible (5.4%). HICP m/m increased for goods, food and energy. Service price pressures hit a new record high of 5.6%. The uptick is probably to a large extend the result of German base effects as the country introduced cheap transport tickets from June to August last year. Core/services inflation is thus unlikely to drop sharply in the summer months.

As the ECB at the gathering last week adopted a data-dependent meeting-by-meeting approach, today’s releases (including GDP) keep a September rate hike firmly on the table for now. Euro area money markets need a bit more convincing though, with a final hike to 4% given a 70% chance give or take. European yields are up 1-2 bps across the curve. US yields painted a similar picture with current changes amounting to less than 1 bp. Markets’ guarded approach today isn’t surprising given the slew of (particularly US) eco data still scheduled for release this week (US ISMs, JOLTS, ADP, payrolls). The Japanese yen on currency markets is strongly underperforming global peers. EUR/JPY rises towards 156.83, nearing the previous 15-year highs of 158+. USD/JPY surpassed 142. The currency is under pressure after the BoJ announced an unscheduled bond buying operation following Friday’s yield surge (which was extended today, 30-y + 11.7 bps). At the other side of the spectrum we find the Aussie and kiwi dollar. Both profit from hopes that China will unveil additional measures to stimulate local consumption to boost the economy. EUR/USD is a tight balance currently turning slightly in favour of the common currency. The pair is filling bids in the 1.103 area. Sterling isn’t going anywhere either as it awaits the Bank of England policy meeting this Thursday.

News & Views

Czech GDP after three quarters in a row grew again in Q2 this year. The economy expanded at a nevertheless slow 0.1% q/q clip. According to the Czech statistical office (CZSO) said domestic “The quarter-on-quarter growth was contributed to by domestic demand while final consumption expenditure of households was stagnating.” Compared to the same quarter in 2022, GDP is 0.6% lower amid a negative influence from lower final household consumption and lower gross capital formation. External demand had a positive influence again, CZSO said. The Czech koruna appreciates today, extending a recent turnaround after having lost more than 4% against the euro since mid-April. EUR/CZK is currently changing hands at 23.89.

Polish CPI dropped 0.2% m/m to be  up 10.8% y/y in July, down from 11.5% the month before. Expectations were for the monthly figure to flatline a third month straight while the yearly figure was estimated at 11%. Fueling the decline were food & nonalcoholic drinks (-1.2% m/m). Polish price pressures have eased since February this year, lifting market bets for a cutting cycle to start fairly soon. National Bank of Poland governor Glapinski earlier in July said a 25 bps cut was possible in September in the not so unlikely scenario inflation by then has fallen into the single digits. That’s what is currently priced in by Polish money markets today. The Polish zloty lost marginal territory in a kneejerk move lower before paring losses again. EUR/PLN (4.406) is currently still trading at the weakest (PLN strongest) level since September 2020.