Markets
ECB members filled today’s dull trading hours awaiting possible fireworks later this week. Comments coming from Frankfurt since last week’s 25 bps rate hike all point to the same scenario: firm backing to continue hiking in July, but more hesitance on the September outcome. Lack of unanimity on how to proceed from there logically explains why ECB President Lagarde kept all options last week during the Q&A session. Data-dependence it is with the September Monetary Policy Report providing new GDP & CPI forecasts. Belgian ECB governor Wunsch kicked off in fashion last week by saying that rate hikes may have to be continued beyond September as the central bank needs to see a sustainable drop in core inflation. So far that’s not the case, with big upward revisions to core CPI forecast in last week’s policy report as a consequence: 5.1% for this year (from 4.6%), 3% for next year (from 2.5%) and 2.3% (from 2.2%) for 2025. Other hawks, like ECB Holzmann or Vasle sounded more conditional: “if trends continue post-summer ECB move may be needed”. ECB Villeroy is in a more neutral camp; saying that interest rates are clearly in restrictive territory and that the ECB has covered most of the ground. His suggestion that the ECB will meet the inflation goal in 2 years doesn’t stroke with official forecasts though. ECB Kazimir today added that he is open for a September move by pointing out that fiscal policies aren’t helping in bringing inflation down. ECB Simkus believes that we’re close the end of the rate cycle, but doesn’t want to rush the September assessment. ECB Schnabel had a close look at hawkish rate hikes by the RBA and by the BoC last week and concluded that the ECB needs to keep raising rates and to err on the side of doing too much given upside risks to the inflation outlook. Both the RBA and BoC had to restart tightening campaigns after pausing too fast. Finally, chief economist Lane kept a very balance tone whereas in the past, he often erred on the dovish side of the aisle. Now he simply states that September is so far away so let’s see then whether there’s room for pause or not.
Traded volumes were low today. The absence of eco data, of US traders (Juneteenth holiday) and this week’s backloaded eco agenda explain a lot. European stock markets failed to build on last week’s momentum with EuroStoxx50 failing to take out this year’s cycle tops around 4400. Main indices lose around 0.5% today. Core bonds face some more selling pressure. German yields add 2.6 bps (2-yr) to 5.5 bps (30-yr). EUR/USD is going nowhere around 1.0925 with EUR/GBP still near key support just below 0.8550. All eyes are on UK CPI data (Wednesday) and the Bank of England verdict (Thursday) later. Will the BoE live up to hawkish market expectations or live up to its nickname of unreliable boyfriend?
News & Views
EU energy ministers balked at Poland’s requested and then secured subsidy extension for coal power plants until 2028. Sweden, which is currently chairing the EU presidency, has allowed the exemption considering Poland’s high reliance on coal currently (+/- 70% of its energy mix) and the need for a steady flow of energy when other (eg. renewable) forms were not available because of lack of stable storage and capacity in general. The extension should buy Poland more time to make the necessary investments. Germany, where coal provides about a quarter of the energy needed still, said that coal plants should run in times of need but giving them an extra subsidy is going too far.
Belgium successfully tapped three existing OLOs for a combined amount of €3.502bn. It sold €1.14bn of its OLO91 series (0% coupon, maturing October 2027) at a 2.878% yield. OLO97 (3%, June 2033) was tapped for €1.357bn with a yield of 3.089% while €1bn of OLO98 (3.3%, June 2054) bonds were sold at 3.518%. Investor interest was decent with bid-to-covers ranging between 1.98 and 2.23. The Belgian Debt Agency projected some €45bn of OLO issuance for 2023. Today’s auctions bring the total amount raised to date at €30.015bn, or 66.70%.
