Markets
The first German regional CPI number immediately grabbed investors’ attention this morning. North Rhine Westphalia CPI fell by 0.1% M/M to moderate from 8.1% Y/Y to 7.5% Y/Y. The euro fell with EU yields as this suggested that expectations for Friday’s EMU print (final input before July ECB meeting) are too aggressive (0.7% M/M & 8.5% Y/Y) while simultaneously confirming that the ECB won’t have to step it up compared to current policy normalization guidance. Other German regional numbers and eventually the national reading confirmed the North Rhine Westphalia dynamic. However, the devil is in the details. Most of the moderation comes from a one-off discount on train tickets. Spanish and Belgian inflation data soon dashed easing inflation hopes. Spanish inflation accelerated by 1.8% M/M to double digit figures (from 8.5%) with the underlying core measure surging to 5.5% Y/Y. Belgian inflation rose by 0.85% M/M to 9.65% Y/Y (from 8.97%). June EC confidence numbers stabilized, avoiding a further decline. Those data capped the strong opening start of European bonds. German yields at the time of writing cede 2.5 bps (30-yr) to 5.1 bps (5-yr) with the belly of the curve outperforming the wings. US yields are practically unmoved. The focal point for US investors follow tomorrow with (outdated) PCE deflators and especially Friday’s manufacturing ISM. The euro failed to really overcome opening weakness with fragile risk sentiment (European stocks -1%) and relative yield dynamics playing in favour of the dollar. EUR/USD currently loses the 1.05 handle. Sterling remains on a slippery slope with EUR/GBP slowly but steadily moving in the direction of the 0.8721 YTD high. At the ECB conference in Sintra, ECB Lagarde, Fed Powell, BoE Bailey and BIS Carstens are currently in a panel discussion. Powell reiterated that the US economy is well positioned to handle a tighter policy, though getting to a soft landing will be a quite challenging. He thinks that markets are by and large aligned with the Fed’s intentions. Money markets currently discount a policy rate of 3.5% around the turn of the year which is seen as the cycle peak. We continue to believe that risks are tilted to the upside of those expectations. Lagarde’s comments obviously are a copy-paste from yesterday’s speech where she indicated to switch from a gradual approach to a more decisive one in case of for example the treat of de-anchoring inflation expectations. News Headlines
Germany plans to bring its finances back in line with its constitutional limits, also known as the debt brake after having spent extraordinary amounts in the period 2020-2022. Finance minister Lindner is targeting a little more than €17bn in additional borrowing next year, a significant cut from the almost €140bn this year. Additional borrowing in the years thereafter should be somewhere between €12.3bn and €13.8bn. The debt brake caps new debt at 0.35% of GDP. The borrowing plans assume German GDP growth of 2.2% this year and 2.5% in the next.
Russia is looking at spending extra revenue from oil and gas to buy “friendly” currencies as a way to ease a scorching rally in the Russian ruble. There is a strong influx of FX because of high demand for and prices of energy. At the same time, FX demand/ruble supply has all but evaporated due to capital controls and import declines. “In order to influence the exchange rate, we are ready to invest in the currencies of friendly countries and through cross-rates with the dollar and euro, we will regulate the value of the ruble in dollars and euro,” Russian finance minister Siluanov said. The ruble erased a 4% gain on the report to trade at USD/RUB 53.15 – still the strongest level in 7 years. Russian central bank governor Nabiullina earlier said there is still room for further reductions in the key rate. After having lifted the policy rate to 20% shortly after the invasion, the central bank in the meantime lowered them back to pre-war level of 9.5%.
