Markets
Prospects for sterling looked bright at the start of trading with Bank of England governor Ramsden providing the GBP-boost. In an interview with the Guardian, he warned for the risk that demand gets ahead of supply and lead to a more generalized pick-up in inflationary pressure. The BoE will not be complacent and can push its policy rate up, he added. The central bank is also carefully looking at the housing market and a raft of real-term indicators. A slower-than-expected recovery – not his base scenario – could dampen inflation. Short term money markets already discount the Bank of England being the first amongst majors to start a tightening cycle somewhere mid next year. Cable tried to take out the recovery high at GBP/USD1.4237, but failed. GBP/USD 1.4237/1.4302/1.4377 is a very strong resistance area (cycle high/50% retracement of 2014/2020 decline/2018 high). The UK currency afterwards fell prey to some profit taking after the unsuccessful attempt higher. The dollar part of the GBP-equation received a minor boost after the Financial Times published an article with St. Louis Fed Bullard. He warns that the US job market is tighter than it looks based on anecdotical evidence pointing at difficulties to hire. Bullard is in the growing, but still minority, camp who’s thinking out loud that discussions on removing some policy accommodation (tapering $120bn monthly purchases) should start. Dallas Fed Kaplan and vice-chair Quarles are on the same line. A speech by heavyweight Washington-Fed based Brainard to the Economic Club of NY is a wildcard. In any case, returning to GBP/USD shows the pair currently changing hands near 1.4155, around 1 big figure below the intraday high. Sterling weakness pulls EUR/GBP back above the 0.86 handle (0.863). The single currency manages to keep pace with the dollar with the EUR/USD pair treading water between 1.222 and 1224 ahead of the May US manufacturing ISM. The European side of the story delivered the first 2% EMU headline inflation print since the end of 2018. The increase from 1.6% Y/Y in May was close to consensus though and didn’t come as a surprise following national readings. Core inflation picked up from 0.7% Y/Y to 0.9% Y/Y and remains subdued. Energy thus remained the biggest contributor to the price increases which still fits in the ECB storyline that any uptick in inflation would be transitory. Core bonds manage to limit the losses today despite the positive risk climate (Europe >1%) and despite higher oil prices (Brent $71/b). US Treasuries underperform German Bunds. The US yield curve steepens with yields adding 0.3 bps (2-yr) to 2.8 bps (10-yr). German yields add up to 0.8 bps across the curve. 10-yr yield spreads vs Germany narrow by up to 2 bps after Giorgia Meloni, leader of the largest opposition party Brothers of Italy, refused a merger of parties on the right (with Salvini’s Lega Nord and Berlusconi’s Forza Italia).
News Headlines
Polish inflation jumped from 4.3% in April to 4.8% in May, reaching the highest level since November 2011. The Polish May manufacturing PMI accelerated from 53.7 to a record high 57.2, with the five sub-indicators of the composite indictor contributing to the rise. The combination of better activity and growing price pressures is making it ever more difficult for the National bank of Poland (NBP) to maintain its pledge to keep the policy rate at the record low level of 0.1%. NBP policy maker Hardt repeated his view that a ‘signaling’ rate move of around 15 bps is already worth considering at next week’s policy meeting as he sees a risk of inflation not returning below 3.5% until the end of this year. Hardt doesn’t want the QE bond buying already be changed yet. EUR/PLN dropped to 4.4650, the strongest level for the zloty in 2021.
Canada GDP rose 5.6% (SAAR) in Q1 after a gain of 9.3% the previous quarter. Household consumption rose 2.7% and gross fixed capital formation added 17.0%. The figure was slightly below the consensus estimate for a gain of 6.5%. However, changes in inventories subtracted 1.48 pp from growth in Q1. Net exports added 0.45 pp. The loonie extended recent gains even as this pattern was already in place before the publication of the data. The USD/CAD cross rate (currently 1.2040) is nearing the YTD low just north of the 1.20 psychological barrier.
