Markets
The European Commission published its updated summer forecasts. Euro area growth was boosted from 4.3% to 4.8% for this year and 4.5% (from 4.4%) for the next. This would bring real GDP back to its pre-pandemic level in the final quarter of this year, earlier than expected back in the spring forecasts. The reason for the more upbeat projections is the rapid progress with vaccinations and resulting easing of restrictions, in particular in services. Rising energy and commodity prices and supply-chain bottlenecks are seen pushing inflation higher to 1.9% this year compared to 1.7% previously anticipated. Inflation should slow down again in 2022 but it could be more persistent if second-round effects were to develop. The timing of such an upbeat narrative couldn’t be any more awkward. The mood on (bond) markets is particularly grim with (real) yields declining yesterday more than 7 bps. The jury is still out whether reasons are predominantly technical (systematically short-covering, low UST issuance and high demand by a.o. the Fed via QE, TGA drawdown) or fundamental (growth concerns, lower long-term neutral rate). Fact is that yesterday’s bond moves continued today and therefore deserve being monitored closely. The US yield curve bull flattens once again with losses at the long end mounting to 3.7 bps in the 10y (and 30y), intensively testing support at 1.35% (June 2021 low). If breached sustainably, it would pave the way towards the February gap around 1.21%. The German curve declines in similar fashion, with yields down 2.8 bps (10y, testing support at -0.30%) to 3.4 bps (30y). As was the case yesterday, peripheral yields are happy to join the trend in core bonds with spreads virtually unchanged. The picture for the dollar was a bit more nuanced compared to yesterday. The greenback traded mixed against G10 peers. The trade-weighted DXY inches marginally higher and is aiming to finish at the highest level since early April. USD/JPY stabilizes around 110.7. EUR/USD falls towards intermediate support around 1.181 and looks vulnerable. Sterling advances slightly vs. the euro. EUR/GBP (0.855) fails to release itself from the gravitational pull around 0.853.
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At first sight, the economic expansion in the Czech Republic continued at a solid pace. Industrial output rose 25.3% Y/Y. However, strong growth compared to last year is still influenced by a favourable base effect. Production in May eased 3.6% M/M. May production was also lower than expected. The decline, amongst others, was due to a slowdown of production in the key automotive industry (-11% M/M). Production is hampered by component shortages. A deceleration is also visible in electrical and chemical industries. Labour shortages and rising input prices are obstructive factors too. New orders rose 46.5% Y/Y (90.0 Y/Y in April). Orders in the automotive industry remain strong (7.0% M/M and 80% Y/Y) but due to supply chain bottlenecks it remains unsure how this will translate into future production. The Czech krona today continued a gradual decline (EUR/CZK 25.67), but this was mainly due a fragile global sentiment rather than the result of domestic data/events.
In report published today, the OECD said that at the end of 2020 the number of jobs in developed countries was still 22 mln lower than before the pandemic. Worldwide the loss of jobs was estimated at 114 mln. For the OECD countries, there are still over 8 mln more unemployed than before the crisis, and over 14 million more people are not actively looking for a job. OECD expects the employment rate (share of working age people employed) to be still below the pre-pandemic level at the end of 2022. The labour market remains vulnerable to a rapid build-up of long-term unemployment. Many who lost their job in the first phases of the pandemic may find it difficult to compete with those whose jobs have been previously sheltered. In this context, the OECD advocates continued, rgeted fiscal support.
