Markets
Core bonds recovered some of the lost ground today. Notable outperformer: UK Gilts. Yields in the UK drop 5 bps at the long end to a whopping 23 bps at the front end of the curve. The sharp decline follows comments from several BoE policy makers, including chief economist Pill, in their appearance before Parliament saying that the proposed price cap on energy would reduce inflation. Tenreyro said the UK economy still has to see the impact of BoE tightening and wants to go slowly when there is a lot of uncertainty. Markets took it as a signal that the central bank may go slower in frontloading interest rate hikes than previously expected, ignoring a more hawkish show by Catherine Mann (inflation spikes are becoming embedded). Governor Bailey stuck to the sidelines in terms of future policy. He did write off PM Truss’s pre-election proposal for the BoE to focus on money supply to conduct policy rather than inflation as not a useful guide. The UK central bank meets next week and markets have dialed back 80% odds for a 75 bps hike to a little over 50% today. There were some spillovers to other core markets. Yields in Germany ease 6.3 bps (30y) to 9.2 bps (5y) and 2.4-4.2 bps in the US. Tomorrow’s ECB meeting is an additional reason for investors to hold a more defensive approach. Energy commodities trade on the back foot. Dutch gas futures slid 5%, oil prices drop 1.5%. Russian president Putin lambasted Europe’s plans for a price cap on gas. He said Russia won’t supply oil, fuel and gas if those caps get introduced. According to a draft plan seen by Bloomberg, other proposals that will be brought on the table at Friday’s European energy summit include a €200/MWh price cap on non-gas generated electricity, a power-demand cut of 10 to 15% across the bloc or one of 5% during peak hours.
Currency markets are again spiced with outright dollar strength. The Japanese yen is once again a sitting duck. In spite of verbal interventions from Japanese government officials this morning, general risk aversion (stocks down 1%) and correcting core bond yields, USD/JPY jumps a little less than 1.5% or more than 2 big figures. USD/JPY tested 145. But EUR/JPY, too, is in a sweet spot, trading at 143.27 (up from 141.43) and nearing previous cycle highs/resistance levels around 144.25. The trade-weighted USD index (DXY) pushed through 110(.72). EUR/USD slipped sub 0.99 for a third time in row but we do stress it’s a dollar-move and not euro weakness. Sterling’s relief rally on PM Truss’s (so far not yet definitive) energy plans turned out to be very short-lived. Losing massive front-end rate support, the pound drops from EUR/GBP 0.86 to 0.866. GBP/USD forfeited 1.15 support to test crucial support at the 2020 low of 1.1421. Breaking below this level would mean a return to levels last seen in … 1985. CE currencies show remarkable forint strength (see below) while the zloty holds stable after the NBP raised rates by an expected 25 bps to 6.75%.
News Headlines
Industrial production in Hungary showed resilient in July. Production grew 1.1% M/M (from 0.7% in June), bringing WDA growth at 6.6% Y/Y. According to the Hungarian Statistical office, growth was mainly driven by activity in the manufacture of transport equipment, as well as the production of computer, electronic and optical products. Production in the sectors of food products, beverages and tobacco products was lagging the broader production dynamics. The forint today outperformed regional peers with EUR/HUF declining from opening levels just below 405 to currently trade below 400.
Czech July retail sales showed a further loss of momentum. Sales (ex. motors vehicle sales) in real terms declined 0.6% M/M to be 7.2% lower compared to the same month last year. Sales of non-food products declined 0.5% M/M. Food product sales decreased 0.3% in a monthly perspective. Only sales of pharmaceutical and medical goods were reported in positive territory year-on-year. The strongest yearly declines occurred in information and communication equipment (-15.1 %), other household equipment (-12.0%) and culture and recreation goods. The Czech korona underperformed other reactional currencies. EUR/CZK eased marginally to trade at 24.6.
