Markets
The ECB hiked rates by 25 bps yesterday, bringing the deposit rate to 3.5%. In the base scenario, another 25 bps move follows in July. The full stop to APP reinvestments kicks in as planned, i.e. from July. The reason for further tightening even as past increases have yet to fully filter through is clear enough: “Inflation has been coming down but is projected to remain too high for too long.” Especially the upward revisions to core inflation (5.1% in 2023!) is worrying. Markets picked up Lagarde’s hawkish message. The front end of the German yield curve underperformed by adding 11 bps (2-y, surpassed the 3% barrier). The 10-y yield struggled with the 2.53-2.57% resistance area but finished 5.2 bps higher nonetheless. Moves were larger intraday but a mixed bag of US economic data interfered. A second straight 260k+ reading of US jobless claims caught markets off guard (245k expected). It helps explain the large outperformance of US Treasuries vs Bunds yesterday. Yields shed between 4.3 and 8 bps. That in turn lifted US equities more than 1% higher but weighed on the dollar. Combined with a touch of euro strength, EUR/USD surged from 1.083 to 1.0945. DXY fell towards the low 102 area. The yen slid, especially against the common currency. EUR/JPY skyrocketed towards a 15-yr high (153.55). A growing spread in central bank policy stance obviously doesn’t help either (see below). The yen loses further ground this morning against all major peers. USD/JPY is attacking recent highs in the 140.7 area. AUD/USD stabilizes near the highest level since February in the high 0.68 zone after a blow-out Australian payrolls report and USD weakness lifted the pair beyond strong 0.68 resistance yesterday. US yields recover a few bps from yesterday, with the front adding up to 3.4 bps. Bund futures deepen yesterday’s losses a bit, setting yields up for a higher open.
The economic calendar is slowly entering weekend mode. After the BoJ decision this morning, we only have U. of Michigan consumer sentiment left for release. The bar is set at a slight increase towards 60, a low level historically. The inflation expectations (1-yr and 5-10-yr ahead) part of the survey is worth mentioning separately. Barring a massive surprise we think the market impact will stay muted with the US readying for a long weekend (Juneteenth holiday on Monday). There may be some further repositioning in store for European markets in the wake of the ECB though. The technical charts, especially for short maturities, offer a helping hand as well. This also goes for EUR/USD. There’s a whole range of ECB and Fed speeches scheduled for today. Sterling is holding strong near the YtD highs. Next week is a pivotal one for the pound. Inflation numbers are due Wednesday with the Bank of England meeting scheduled a day later.
News and views
The EU Court of Justice yesterday ruled that EU law does not preclude customers from seeking compensation from banks going beyond reimbursement of the monthly installments paid after FX mortgage loan contracts are cancelled due to unfair terms. By contrast, it precludes the bank from relying on similar claims against consumers. The ruling came in the context of CHF-based mortgage loans by Polish banks. In a separate ruling, the EU court said that Polish courts can’t refuse customers a suspension of their obligation to make monthly mortgage payments in pending disputes over unfair terms in their contracts. The Polish financial regulator called on lenders to include the impact of the verdict in their provision models and that said that settlements are the most attractive and rational alternative to a costly and length legal path.
The Bank of Japan kept its monetary policy unchanged this morning, still pushing back against policy normalization even as inflation runs above the central bank’s 2% target. It has been at around 3.5% recently owing to the effects of a pass-through to consumer prices of cost increases led by a rise in import prices. The BoJ expects inflation to decelerate toward the middle of fiscal 2023. Japanese economic growth recently picked up and is likely to recover moderately supported by some pent-up demand. Risks to the outlook are extremely high with special attention needed to developments in financial and FX markets. Yen weakness recently became a topic again for Japanese officials as the currency slid to the weakest levels since just before last year’s interventions started. (USD/JPY > 140; EUR/JPY > 154, highest since 2008).
