Sunset Market Commentary

Markets

In today’s extremely dull trading session, some volatility in the New Zealand dollar, Norwegian krone and Czech koruna are keeping us somewhat entertained. You’ll find the latter two in the section down below. NZD is under pressure (NZD/USD 0.6078) following this morning’s central bank meeting. Its remarkable dovish pivot from a hawkish stance in May didn’t go unnoticed. Swap yields tumbled almost 20 bps at the front end of the curve and markets are now taking a first rate cut already in August into serious consideration (>50%). The sharp repricing followed after the RBNZ suddenly (i.e. without new actual data) sees inflation entering the target range already in the second half of the year, high domestically generated price pressures aren’t as much of a persistent problem as they thought less than two months ago and the economy is weakening according to unspecified “high frequency indicators”. This culminated in an addition to the policy statement saying that “The extent of this [monetary] restraint will be tempered over time consistent with the expected decline in inflation pressures.”, a clear hint for (near-term?) rate cuts.

There’s not much happening in core markets, not for obvious reasons anyways. Bunds underperform US Treasuring in a reversal of yesterday’s dynamics. German yields decline between 2.7 and 5.1 bps across the curve. US rates drop less than 2 bps ahead of Powell appearing before the House. If his Senate performance yesterday was already a non-event, then we don’t know how exactly to describe today’s do-over. Tonight’s $39 bn 10-yr bond auction is worth mentioning, to be followed by the $22 bn 30-yr one tomorrow, along with the June CPI release. Currencies other than the ones above trade listless.

News & Views

Inflation in the Czech Republic in June decelerated much faster than both markets and the Czech national bank (CNB) expected. Prices declined 0.3 M/M In June. Y/Y headline inflation dropped back from 2.6% to 2.0%, exactly returning to the CNB target. Monthly price decline occurred in several subcategories but with major contributions from transport (-1.2% M/M) and food and beverages (-0.6% M/M). Recreation and culture (+0.4%) and restaurants and hotels (0.5%) still recorded higher prices in a monthly perspective. In its spring forecast published early May, the CNB forecasted June inflation at 2.4% Y/Y. KBC expects headline inflation to decline further below the target in coming months taking into account announced summer and autumn energy price cuts. The CNB at its June meeting surprised at least part of the market as it maintained a 50 bps cutting pace (to 4.75%). However at that time, the bank indicated that from now it intended to slow the pace of further rate cuts or even make a pause if necessary. Given the June inflation data, the latter probably won’t be necessary anytime soon. Markets now discount additional 25 bps cuts at each of the remaining meetings this year. The expected loss of interest rate support continues to weigh on the Czech koruna. At EUR/CZK 25.38, the Czech currency is again with striking distance of the weakest levels of 2024 touched early February (EUR/CZK 25.52).

Inflation in Norway also slowed more than expected in June. Headline inflation printed at 0.2% M/M and 2.6% Y/Y from 3.0% in May. CPI-ATE inflation (adjusted for tax changes and excluding energy) eased to 0.2% M/M and 3.4% Y/Y (from 4.1% and 3.6% expected). Prices decreased in recreation and culture (-0.8% M/M), furnishings and household equipment (-0.4%) and clothing and footwear (-0.3%). Prices for restaurants & hotels (0.6%) and food and non-alcoholic beverages (1.9%) still rose. The slowdown in inflation should give some comfort to the Norges bank. At the June meeting it still was worried that wages could keep inflation higher than hoped for, potentially requiring tight policy for longer than it previously anticipated. NB indicated that the policy rate might be kept at 4.5% for the remainder of the year. The NB probably won’t be in a hurry to aggressively change guidance, but markets now see a growing chance (<50%) for an inaugural rate cut in December. The krone after the CPI release weakened sharply from EUR/NOK 11.47 to 11.59.

Graphs

EUR/NOK: Norwegian krone slips after CPI eases more than expected, questioning the central bank’s hawkish guidance

EUR/CZK closing in on the 2024 highs as unexpected monthly price drop brings Y/Y measure to CNB target

NZD/USD: kiwi dollar takes a hit from RBNZ’s remarkable dovish pivot

German 10-yr yield reverses yesterday’s rise, on track for a test of first support