Markets
US Treasuries slightly underperformed German Bunds today in rather dull trading session. Stellar June retail sales contributed to this different performance. Headline retail sales rose by 0.6% M/M with the GDP-relevant control group adding 1.1% on a monthly basis. May numbers did face a downward revision. US yields currently add 1.4 bps (2-yr) to 3 bps (5-yr) in a daily perspective. Changes on the German curve are negligible. The US dollar is marginally stronger in a daily perspective. The trade-weighted greenback changes hands near 92.70 and seems happy to end the week below intermediate resistance of 92.85. EUR/USD finds itself near the 1.18 big figure with EUR/USD 1.1772 support probably also safe ahead of the weekend. EUR/GBP is near unchanged at 0.8545 with sterling still not picking up the potential hawkish BoE shift in August. Hanging on the other side of the balance is the threat of new lockdown restrictions as pointed out by solicitor general Frazer with the delta variant running riot in the UK.
Focus will shift to Europe next week with the hyped July policy meeting and EMU PMI’s. ECB Lagarde recently stressed the importance of the otherwise dull July meeting after the unexpected conclusion of the central bank’s Strategy Review. The ECB swapped the close to, but below 2% inflation target for a hard 2% one while allowing for temporary deviations (symmetry). Lagarde added that this new inflation target might take a little longer to reach and stressed the acceptance and tolerance of temporary higher inflation. The new inflation target calls for new wordings around forward guidance on both interest rates and asset purchases, something the ECB will update next week. Apart from the semantics, ECB Lagarde indicated additional clarity on the post-PEPP period. The ECB’s current €1.85tn Pandemic Emergency Purchase Programme runs at least until March 2022. Since March, the weekly pace stands at €15/20bn. We argued before that around the PEPP shelf date, the ECB could temporary raise asset purchases under the regular APP (currently €20bn/month) in order to smoothen the eventual exit process. Lagarde hinted in that direction by talking about a “transition into a new format”. By tackling the asset purchases issue already in July, the ECB avoids an unwarranted build-up in tapering expectations: “We need to be very flexible and not start creating the anticipation that the exit is in the next few weeks, months”. Besides clearing the air on future policy (= removing uncertainty), the central bank will simultaneously extend the time frame for which ultra-easy monetary policy conditions will remain in place. By doing so, she breaks ranks with the current views inside the Fed (tapering discussion ongoing) and BoE (net asset buying to end by the end of the year).
News Headlines
Core inflation in Poland as calculated by the National Bank of Poland slowed slightly more than expected. Inflation excluding food and energy prices was 0.0% M/M and 3.5% Y/Y, down from 4.0% Y/Y in May. Core inflation excluding administered prices slowed to 0.1% M/M and 4.0% (from 4.4%). Despite the June easing in inflation, the NBP at this July Policy meeting substantially raised its inflation forecasts (expected 4.1% for 2021). However, it sees inflation as due to temporary factors or factors that are out of scope of monetary policy. In this same ‘soft’ narrative, MPC member Lon on Reuters said that “In a situation where the impact of the fourth wave on the outlook for economic growth turned out to be significant, we could cut interest rates or increase the scale of asset purchases, or both.” At EUR/PLN 4.585, the zloty is trading near the weakest level against the euro since end April.
A report of the UK House of Lords Economic affairs Committee asked the BoE to provide better justification for its assessment that inflation is temporary and raises questions on the efficacy of the BoE’s QE programme. The Committee concluded that the BoE’s Asset Buying programme risks stoking inflation, widening inequality and has done little to boost economic growth. In a response, the BoE reiterated its commitment to price stability and stressed the programme supported all borrowers at time of extreme economic distress.
