Markets
German ECB governing council member Schnabel set the tone for trading today immediately after the European opening bell. Her nationality makes her monetary hawk both by nature and by nurture. The observation that she kept options open for the September policy meeting took part of a divided market by surprise and tempered those expecting a 25 bps rate hike, including ourselves. Should the ECB’s assessment be that the transmission of monetary policy suggest that the pace of disinflation is proceeding as desired, then they may afford to wait until the next (October) meeting to gather more evidence. Schnabel admitted that underlying price pressures remain stubbornly high with domestic factors being the main drivers, but put a lot of onus of the weaker growth outlook compared to June ECB forecasts. Back then, the central bank prognosed 0.9%, 1.5% and 1.6% GDP growth for the 2023-2025 period. The timing of Schnabel’s comments added to the astonishment for some given that they came as EMU inflation numbers were about to print on the upside of expectations following several national releases. Headline CPI effectively accelerated to 0.6% M/M (vs 0.4% expected) with the annual figure stabilizing at 5.3% Y/Y (vs 5.1% expected). Underlying core CPI moderated as forecast from 5.5% Y/Y to 5.3% Y/Y. EMU money markets yesterday attached a 50 bps probability to a September move with a 25 bps hike fully discounted by the end of the year. After today’s comments and CPI data, those dropped to respectively 25% and 50%. In today’s momentum, markets also spotted some more “pause” signals in the Minutes of the July ECB gathering. These included a reference to the contained risk of a wage-price spiral and an initial preference for not hiking even though all members eventually supported the July 25 bps rate hike. However, Minutes concluded that “Taken together, the September projections, the evolution of underlying inflation and incoming information on monetary transmission would help the GC update its assessment of the appropriate monetary policy stance.” So the jury remains out on the issue and we don’t alter our 25 bps rate hike call.
The repricing on money markets was visible further down the curve as well. German Bunds outperform US Treasuries today. German yields lose 2.5 bps (30-yr) to 6.5 bps (2-yr). US yields changes vary between +0.4 bps (2-yr) and -1.7 bps (30-yr) but US Treasuries obviously outperformed the past two sessions on slightly disappointing US data. The loss of interest rate support pulls EUR/USD back below 1.09 (1.0860 currently) while stock markets record small gains (+0.25% in both Europe and the US).
News & Views
Polish inflation flatlined in August (0.0% M/M), bringing the yearly figure further down from 10.8% to 10.1%, data from Statistics Poland released today showed. The near-consensus outcome is the lowest print since February last year. Food again dipped at a solid -1% monthly pace but fuels for personal transport rose by 1.9% amid a powerful oil price rise in recent weeks. National Bank of Poland governor Glapinski has repeatedly cited single-digit inflation as a prerequisite for (beginning the debate on) rate cuts, provided price pressures maintained a downward trend. This is likely to be the case next month. The central bank meets next week (September 6). At the meeting thereafter (October 4) it will have the September inflation print (29/09) at its disposal, potentially allowing the NBP to make a dovish U-turn ahead of important parliamentary elections on October 15. The Polish zloty reacted muted to the numbers. EUR/PLN is going nowhere near its recently found equilibrium around 4.47.
The Turkish economy topped estimates by growing 3.5% Q/Q in the second quarter of the year. Analysts had penciled in 2.3%. GDP is now 3.8% bigger than in the same quarter last year. The expansion was fueled by higher consumer demand and government spending, in particular in the run-up to the May election. Re-elected president Erdogan amongst others had distributed one month of free natural gas to woo voters. Household consumption shot up 15.6% while government expenditures rose by 5.3%. Exports tumbled 9%, highlighting weaker global demand. In terms of sectors, value added in the construction sector rose 6.2% as the country’s infrastructure recovery continued going into Q2 after the February earthquake. Looking ahead, Turkish growth is expected to ease following, amongst others, the sharp increase in central bank interest rates. The CBRT last week lifted the policy rate from 17.5% to 25%.
