Markets
Even with no guidance from the US (markets close for Juneteenth) and no important data in Europe, the natural drift in European yields was to extend the recent uptrend. ECB speakers can’t but subscribe ECB’s Lagarde’s commitment to take a next 25 bps step at the July meeting. What happens later is subject to an internal debate. Hawks clearly indicate that the ECB has further to go at the September meeting as core inflation continues its higher for longer path. In this respect, ECB’s de Guindos said that the slowdown in core inflation might be more limited than the decline in the headline measure. More dovish oriented members (e.g. chief economist Lane) stress current data dependent ECB-modus which makes it too early to already guess on the appropriated policy action in September. Even so, German yields in a modest steepening move added between 3.7 bps (2-y) and 5.3 bps (30-y). At 3.16%, the 2-y closed at the highest levels since SVB/CS turbulence in March. The 10-y yield (2.52%) is closing in on the key 2.55% resistance area. Higher yields and a lack of guidance from the US prevented the EuroStoxx 50 to go for a test of the 4412 top (-0.74%). In technical trade, EUR/USD lost modest ground closing at 1.0921. The yen stabilized near recent low levels both against the dollar (USD/JPY 141.98) and the euro (EUR/JPY 155.09). UK bonds again hugely underperformed Bunds going into tomorrow’s UK CPI release annex Thursday’s BoE policy decision. In a sharp further curve inversion UK yields gained between 13.8 bps and 3.2 bps, with the 2-y easily surpassing the 5.0% barrier. EUR/GBP intraday touched a new ST low near 0.8520, but in the end EUR/GBP closed little changed (0.8537).
This morning, most Asian equity markets (except Australia, cf infra) are in a mild risk-off modus. Chinese banks eased the Prime Lending rate for 1-y and 5-y loans by 10 bps to respectively 3.55% and 4.20%. Some markets participants apparently hoped for more generous stimulus. The yuan weakens further (USD/CNY 7.177). The yen also stays in the defensive (USD/JPY 142.1) as US yields join the upside drift in Europe. Later today, the calendar mainly contains building permits and housing starts. Yesterday, NAHB homebuilders sentiment unexpectedly jumped from 50 to 55 (highest in 11 months). Is this a sign that interest rate sensitive parts of the economy stay resilient too? In US yields, the 2-y is again nearing the 4.80% resistance, the last hurdle before the 5.08% March top. The US 10-y (3.80%) meets similar resistance at 3.85%. Last week’s USD setback/euro rally are taking a breather. This process might continue short-term, especially if equities would fall prey to some profit taking after recent rebound. In CE, we also keep an eye a the rate decision of the Hungarian central bank (expected to ease the O/N deposit rate to 16%).
News and views
The Reserve Bank of Australia’s June policy meeting minutes showed the unexpected 25 bps rate hike to 4.10% was the result of “finely balanced” arguments. They considered inflation risks shifted to the upside. Some firms indexed prices to past inflation, making price pressures more persistent, especially against the backdrop of still little spare capacity and very low unemployment. The rate hike was based on inflation taking longer to hit the target and would boost confidence in the process. Arguments in favour for a pause, which was the analyst consensus then, included considerable uncertainty on household spending and the fact that past hikes will sharply slow the economy. Falling commodity prices and international shipping costs meanwhile pose downside inflation risks. All things considered, the case for a hike was stronger nevertheless and the RBA even kept the door open for further hikes if needed. Markets view the minutes as softer than the actual statement though. They were probably caught off guard by the RBA labeling it a finely balanced decision. Australian swap yields tumble between 2.7 and 8.9 bps with the front end of the curve outperforming. Money markets slightly pare their tightening bets, stopping short of pricing in two more 25 bps rate hikes by November. The Australian dollar slips, extending its recent loss streak into a third day. AUD/USD moves from 0.685 at the open to test the 0.68 big figure. RBA’s deputy governor Bullock in an interview later highlighted the central bank’s data dependence. The factors they are looking at are “inflation, particularly services prices, employment, consumption and what households are doing with their savings buffers, and the global economy, including China.” She also said the jobless rate may need to rise toward 4.5% from 3.6% today for inflation to return to target.
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