Markets
Fears on a potential sharp setback in (US and global) growth again outweighed persistent high inflation as a driver for trading on Friday. The flash preliminary EMU CPI printed higher than expected at 0.8% M/M and 8.6% Y/Y (was 8.1% in May) even as German inflation was softer than expected due to a one-off price decline on some transportation fees. Core inflation eased slightly to 3.7% from 3.8%, but with no indication of a profound trend reversal yet. Bonds even started a new up-leg in US dealings, reaching a new recovery top as a disappointing US manufacturing ISM questioned the room for the Fed (and other CB’s) to continue their anti-inflation campaign. The headline ISM eased from 56.1 to 53.0. Production held up well (54.9), but forwarding look sub-indices including new orders (49.2) and backlog of orders (53.2 from 58.7) suggest a further slowdown ahead. Employment also dropped further in contraction territory (47.4). After a new spike higher, bonds slightly eased off intra-day peak levels but still finished the day with impressive gains. US yields declined 16 bps (5-y), 13,2/12 bps for 10 and 2-y yields and 8 bps for the 30-y. The Bund curve showed a similar picture easing 13.9/13.2 bps (5/2-y) to 5.1 bps (30-y). Despite a fragile risk sentiment, intra-EMU spreads versus Germany continue to narrow (10y Italy minus 7 bps). Equities closed off intraday lows (EuroStoxx -0.2%, US indices even gained about 1% on lower yields). Still, the technical picture remains hesitant, at best. The decline in US yields also capped further USD gains. DXY stayed away from the 105.78 correction top (close 105.14). The yen even slightly outperformed (USD/JPY close 134.12). EUR/USD temporary dropped below the 1.04 handle, but the real test of the key 1.0350/41 area was again avoided (close 1.0414). The gradual but protracted EUR/GBP uptrend stayed in place (close 0.8616). Markets will probably take a slow start to the week as US markets are closed of the 4th of July holiday. The eco calendar is Europe is thin. Asian markets show a mixed picture despite Friday’s WS rebound. For the German 10-y yield the 1.19%/1.15% area (previous top/38% retracement) serves as a key support. The dollar rally slowed (both in DXY and USD/JPY and EUR/USD). However, if uncertainty on global growth/risk-off persists or intensifies (quid earnings season?), a sustained rebound in the likes of EUR/USD isn’t evident. A retest of the 1.0341 level remains a decent possibility. Later this week, we keep a closed eye at the RBA interest rate decision (Tuesday), the US Services ISM and the Minutes of the June Fed meeting (Wednesday) and the US payrolls on Friday.
News Headlines
The European Central Bank is looking into changing the parameters of outstanding targeted longer-term refinancing operations (TLTRO). The loans, with maturities of three years were offered from September 2019 onwards at a quarterly basis. Currently, there’s still some €2.2tn outstanding. The rate on the loans is calculated as the average price over their three-year life. Initially, they were available at -0.5%, but that changed during the pandemic to -1%. Since last month, that discount is removed again with the deposit rate returning as the reference. Even if the ECB embarks on a tightening cycle, there is a strong incentive to keep TLTRO’s until maturity rather than repay them early given the pick-up between the average cost and the higher actual deposit rate. Sources close to the ECB suggest this windfall, estimated at around €14bn, is politically unacceptable. Czech President Zeman said he thinks that new board members of the Czech National Bank – installed by Zeman – lack any inclination towards dramatic rate hikes. He added that raising rates is not a way to suppress cost inflation as interest rates are one of the cost items. Zeman also pointed to the gap between negative ECB rates and the CNB policy rate of already 7%. The August 4 meeting is the first following the dovish rotation at the CNB. Money markets discount only a small additional hike to fend off 16% Y/Y inflation and are even thinking about rate cuts on a 12-month horizon. CNB since June defends the CZK from weakening beyond EUR/CZK 24.75 through FX interventions..
