Markets
Try breaking a story when EUR/USD’s intraday trading range is between 1.2115 and 1.2135… The narrative is quite obvious though: everybody side-lined ahead of tonight’s FOMC. Dovish bets have been placed, let’s wait how the dies are effectively rolled. A fresh batch of US eco data didn’t alter that muted trading pattern. Import and exports prices – you guessed it – increased faster than expected in May. On a yearly basis, they are respectively 11.3% and 17.4% higher. Housing starts printed near consensus (3.6% M/M) with building permits unexpectedly falling by 3% M/M. The latter is in line with the topping off pattern visible in MBA Purchases applications with sky-high commodity prices and building materials often mentioned as postponing buying decisions. (European) stock markets hover between narrow gains and minor losses while core bonds have small upward intraday bias. The US yield curve bull flattens with yields shedding 0.2 bps (2-yr) to 0.9 bps (30-yr). The German yield curve shifts in similar fashion with yields sliding 0.5 bps (2-yr) to 1.2 bps (30-yr). 10-yr yield spreads vs Germany are virtually unchanged. Sterling slightly outperformed other majors today in a move which followed higher-than-expected May CPI inflation numbers. Both headline (2.1% Y/Y from 1.5% Y/Y) and core inflation (2% Y/Y from 1.3% Y/Y) beat consensus by a rather wide margin. It adds a little bit of pressure in the run-up to the June 24 Bank of England meeting, though expectations remain low. The key one for the BoE is the August 5th meeting including new monetary policy report. EUR/GBP switched sides around the 0.86 big figure, but remains within the narrow range of the past months.
A brief sum-up of our view on tonight’s FOMC. Inflation projections will most likely show an upgrade after the recent high readings that took both the Fed and markets by surprise. We expect the strong and ongoing economic recovery to have convinced a majority of Fed governors of higher policy rates in 2023 instead of 2024. We see risks for the Fed hiking the IOER rate (0.1%) and/or the rate paid on its reverse repo facility (0%). This meeting will mark the start of also discussing the government bond and MBS buying programmes: they will “talk about talking about tapering”. It’s a first step in what is probably going to lead to pace down MBS buying first later this year followed by govies in 2022. We expect chair Powell to flank the upbeat forecasts with an as dovish possible tone. There is room for some return action higher in US yields, especially after the recent decline. The dollar could profit from some taper anticipation though much depends on what will be driving rates: inflation expectations (market assume a too slow Fed) or real yields. EUR/USD’s first support area situates around 1.205 (38.2% retracement April-May rise).
News Headlines
The Chinese National Food and Strategic Reserves Administration said that it will sell some of the State stockpiles in aluminum, copper and zinc to metal manufacturers and fabricators via a program of public auctions in the near future. The statement didn’t provide indications on the amounts that will be made available. The move is a next step in an attempt by authorities to cap surging commodity prices and address a further rise in factory gate prices (PPI) which might finally filter through into consumer prices. Global commodity indices (e.g. the CRB commodity index) recently showed signs of topping. Copper already trades more than 10% below the early May peak.
The National Bank of Poland (NBP) released its monthly core inflation statistics. May Core inflation net of food and energy prices came in at 0.3% M/M and 4% Y/Y (from 3.9% in April). Last week, the NBP left its policy rate unchanged at 0.1%. The majority of the MPC supports ongoing monetary policy stimulus even as a minority wants to address rising inflation by an early rate hike. The zloty today rebounds to EUR/PLN 4.51.
The European Commission has decided to give green light to Portugal’s €16.6 bn recovery and resilience plan. It is the first approval of such a plan. Portugal will receive €13.9 bn in grants and €2.7bn in loans in the period until 2026.
