Sunset Market Commentary

Markets:

Trading today was supposed to be a long-drawn countdown to the US CPI release. However, Asian investors got a first surprise impulse as the PBOC unexpectedly cut its 7-day reverse repo rate by 0.1% to 1.90%. Chinese inflation remains low (CPI 0.2% Y/Y, PPI -4.6% Y/Y in May) suggesting a sluggish post-pandemic recovery. The prospect of further stimulus supported risk sentiment in the region. Spill-overs to the likes of Europe were temporary and limited. Copper and oil gained, but especially oil (Brent $73,5/b) is still holding relatively close to the YTD lows. The yuan extended its recent decline. At USD/CNY 7.16, the yuan touched the weakest level since November.

UK labour data also delivered quite a huge surprise. UK job growth in the three months to April jumped 250k (3M/3M). The unemployment rate eased from 3.9% to 3.8%. Last but not least, wage growth (ex-bonus) accelerated sharply from 6.8% 3M/Y/Y to 7.2%. There is no one-on-one link between the labour data and the UK May inflation to be published next Wednesday. Even so, they evidently more than fulfill the condition from the BoE monetary policy statement ‘The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required’. UK bond yields jumped between 20 bps (2-y) and 4 bp(30-y). The UK 2-y yield now surpasses the top during the Truss-Kwarteng fiscal/financial stability crisis in September, reaching the highest level since the GFC in 2008. Money markets now see the peak BoE policy rate well north of 5.5% in Q4. Still, a 50 bps rate hike next week is seen as unlikely (25%). Strangely, sterling hardly profits from a favourable interest rate differential. At EUR/GBP 0.8580, it stays relatively far away from the key 0.8540 area tested yesterday. FX traders apparently err to the side that at current levels enough interest rate support should be discounted for sterling and/or that a too slow BoE reaction function only clouds already weak UK growth prospects further down the road.

The PBOC interest rate cut and/or the UK labour data had limited impact on EMU/US bonds. US and German yields traded almost unchanged (< 2bps) going into the US CPI release. The US CPI was close to expectations with the headline at 0.1% M/M and 4% Y/Y (from 4.9) and core at 0.4% M/M and 5.3% Y/Y (from 5.5%). However, in an understandable asymmetric reaction, US yields declined temporary (2-y -8 bps) as some market participants apparently still feared that a stronger than expected figure could question the Fed ‘skip ‘ scenario. This option is now scrapped. Even so US yields currently again trade little changed (2-y -2.5bps, 30-y +2 bps). German bunds underperform (2-y +4 bps; 30-y 0.5 bp). (European) equities couldn’t keep PBOC-driven gains at the open, but regained some ground after the US CPI (EuroStoxx +0.6%, S&P 500 +0.6%). The combination of softer US yields and a constructive risk context triggers further USD profit taking. DXY nears the 103 area. EUR/USD regained the 1.0775 resistance area, but still struggles to move above the 1.08 barrier in a sustainable way. USD/JPY extends its short-term consolidation pattern between 139/140

News & Views:

Hungarian business newspaper Vilaggazdasag reported that PM Orban’s government may pass a decree to overwrite private contracts between SME’s and utility providers (especially fixed-price electricity contracts struck during the height of the energy crisis) to lower their costs and help slow inflation which still runs at a Y/Y-pace over 20%. The head of the Hungarian Chamber of Industry and Commerce said that the change could be approved within a week. The Hungarian forint loses ground today. In hindsight, the forint may also face selling pressure as comments by Economic Development Minister and previous central bank governor Nagy yesterday get a bigger platform. He suggested that a higher inflation goal may help lower real interest rates, making borrowing more accessible, incentivizing investment and economic expansion. Nagy is part of the wing who believes that inflation won’t return to target due to structural factors like energy, demographics and cost of capital. Acknowledging a higher inflation target implies, all else equal, faster scope to introduce policy rate cuts. The MNB last month started lowering its emergency deposit rate (17% from 18%) towards the normal policy rate (13%). EUR/HUF rises from 369 to 371. From a technical point of view, the extensive test of EUR/HUF 368 support is rejected.