Markets
Europeanstock markets built on Asian risk momentum at the start of trading, but had some difficulties to really hold on to that vibe. As the US session gets going, they gain around 0.5% compared to +1.5% at their best levels around European noon. It’s another sign that the global setting of central bank policy normalization, high inflation, sluggish growth forecasts and still relatively high valuation isn’t really inviting for bulls to show their teeth. We remain in a sell-on-upticks environment with room for correction higher near term given the absence of inflation numbers and central bank meetings before the end of the month. Core bonds followed the intraday dynamic of stocks. They attempted to recover some lost ground in the early stage of European dealings, but the move lacked dash and was followed by return action lower. The German yield curve steepens at the time of writing with daily changes varying between -1.3 bps (2-yr) and +3 bps (30-yr). Peripheral yield spreads vs Germany narrow by up to 3 bps with Greece (-13 bps) and Italy (-7 bps) continuing their outperformance since last week’s extraordinary ECB meeting in which the central bank added strength to its commitment of not allowing for market fragmentation during the normalization cycle. Yield changes on the US yield curve are amplified by yesterday’s Juneteenth holiday. The US yield curve bear steepens with yields rising by 0.8 bps (2-yr) to 7.9 bps (30-yr). The euro gains some technically insignificant ground to trade at 1.0550 from an open at 1.0511. First intermediate resistance stands at 1.0627/42. EUR/GBP in the same vein rises to the 0.86 handle. Comments by BoE chief economist Pill are ignored. He added weight to last week’s policy meeting outcome (sharper tightening might be on the horizon) by saying that he would sacrifice some growth to cut inflation. Before last week’s meeting, the BoE sounded less firm in its inflation fighting commitment compared with other central banks. UK Gilts underperform today, rising by 4 bps (2-yr) to 7 bps (30-yr). Eco and event news was thin today, though we retain the ECB’s new measure of domestic inflation for the euro area that takes into account the import intensity of HICP items (“Low Import Intensity or LIMI-indicator). More specifically it looks at items like housing rentals, domestic services, maintenance and repairs en education. LIMI suggests that, although the sharp rise in headline inflation is mainly explained by imported inflation, domestic inflationary pressures have also increased over the past year. Tracking back, the LIMI-indicator started to point at increasing underlying inflationary pressures in the years immediately preceding the Covid-pandemic. It restarted its upward trend in mid-2021, passing 2% in the final quarter of last year to currently trade around 3.25% Y/Y.
News Headlines
The Russian ruble continues to appreciate and is now trading at a 7-year high vs the dollar (USD/RUB 54.7). The strong ruble was powered by surging prices for Russia’s commodity exports while imports collapsed and is increasingly posing a threat to exporters and public finances. Russian officials are scrambling for ways to keep the currency on a leash without abandoning the 4% inflation target. The most obvious one – direct FX interventions – is prevented by international sanctions. A suggestion that didn’t make the cut was a requirement for exporters to convert their earnings into yuan. Another abandoned idea was modeled after Iran’s approach to include two-tier exchange rates. One of the only options that remain open is to further loosen rules on currency operations for companies active abroad and more access to foreign exchange for households and business at home.
British manufacturing order books deteriorated in the three months to June, CBI data revealed. The diffusion index fell from 26% to 18% vs 21% expected. That is still high compared to history though, 0% in the series is considered a “normal level”. Slipping export orders (falling back from 19% to a 1%) were the main responsible. Looking ahead, the subseries gauging output volumes for the next three months eased slightly from 23% to 20%. Selling price expectations over that same period fell markedly, from 75% to 58%, a 9-month low. CBI notes that “we may be seeing the first signs that weaker activity is beginning to slow the pace of price increases in the sector.”
