Markets
Today’s European trading session isn’t the most enticing one. EUR/USD for example trades listless in a 35-tick trading range, just above 1.12. The trade-weighted dollar portrays a similar indecisiveness around 97.40. USD/JPY switched sided around the 107 mark today in some bizarre moves. Sterling can’t built on yesterday’s promising return. UK Chancellor Sunak’s suggestion to tie a decision on additional stimulus to consumption patterns after the UK economy reopens early July could be the reason. Some expected extra support whatsoever. EUR/GBP returns to the high 0.90 area. Core bonds eke out small gains. Daily German yield changes are limited to 1 bp. US Treasuries outperform with the yield curve bull flattening. US yields decline by 1.1 bp (2-yr) to 3.2 bps (30-yr). European stock markets keep yesterday’s momentum going with gains of up to 1%. ECB President Lagarde warned that the economic recovery will be restrained and incomplete as trade and productivity won’t return to pre-crisis levels. She thinks it will take some time before the “phenomenal” jump in savings will trickle into higher consumption and investments. Household savings for example soared by €214bn between February and May to hit a record €7.3tn. ECB Rehn warned that the danger of deflation has re-emerged. The central bank won’t opt for an early withdrawal. It strengthens market’s conviction that central bank support is here to stay. US equities have a more difficult start and suggest that trading dynamics could still change in the final hours of this week. US financials underperform after the Fed decided to cap dividend payments and suspend share repurchases for large banks in Q3 2020 in order to preserve capital. The decision was taken after stress test results for 2020 showed aggregate loan losses ranging from $560bn to $700bn and aggregate capital ratios declining from 12% in Q4 2019 to between 9.5% and 7.7%. End-of-quarter flows could also influence this week’s remaining dealings. Additionally, it could be better to be safe than sorry given explosive COVID-19 (US) infection rates which already forced some states to pause or even overturn some of lockdown reversal measures. US eco data showed personal income falling by 4.2% M/M in May with spending rising by 8.2% M/M. Spending increased thanks to some pent-up demand as economies reopened and with coffers strengthened by April’s 10.8% M/M income surge (related to government relief payments). Both PCE headline and core deflators stabilized in May, respectively at 0.5% Y/Y and 1% Y/Y which is way off the Fed’s symmetric 2% inflation target.
News Headlines
According to comments from the deputy governor of the Hungarian Central bank, Barnabas Virag, the Bank has room to cut rates by another 15 bps (currently 0.75%) at the next meeting in July. However, he expects the NBH to keep a buffer from zero interest rates and not to engage to another easing cycle. The MNB this week already cut its policy rate by 15 bp. The forint weakened after the rate cut and continues to do so today. EUR/HUF is trading near 355. Virag declined to comment on ST moves of the forint.
In an interview with Bloomberg, UK Chancellor of the Exchequer said he will set the bar exceptionally high for companies seeking a taxpayer-funded bail-out. The chancellor also indicated that the Valued Added Sales Tax probably won’t be cut anytime soon as household balances are reasonably strong. He expects the furlough program to wind down in the fall, indicating it can’t be sustained indefinitely.
The Administration of President Trump asked the US Supreme Court to invalidate the Affordable Care Act (Obamacare). The move might intensify the political controversy and make healthcare as a major election issue
