Markets
Friday’s risk-off market setting persisted at the European start to the trading week. The Russian uprising offered at least part of the explanation from a short term dynamic point of view. German Ifo business sentiment fell back in June (especially expectations) but that didn’t came as a surprise after last week’s dismal German PMI. Risk sentiment turned more neutral from the start of US dealings with US Treasuries for example paring all gains into the close. The US eco calendar was empty apart from a $42bn 2-yr Note auction. Investors other than primary dealers took around 87% of the amount on offer (68.5% for indirect bid), which is one of the highest shares ever. The auction stopped slightly through the 1 PM bid side with the auction yield (4.67%) just below the 16-yr high from February (4.673%). The bid cover was 2.86. The US Treasury continues its end-of-month refinancing with a $43bn 5-yr Note auction tonight. Daily changes on the US yield curve ranged between flat and -2.3 bps (5-yr) with the belly of the curve outperforming the wings. German Bunds outperformed with yields losing 2.2 bps (2-yr) to 4.7 bps (5-yr). From a technical point of view, the German 10-yr yield tests support coming from an incoming upward trend line with the 200d mavg being the high profile mark at 2.26%. European stock markets ended mixed as did the US (ranging from flat for Dow to -1.16% for Nasdaq). EUR/USD went nowhere, starting and ending the day just above 1.09.
ECB Lagarde today gives the formal start to the ECB’s annual forum in Sintra. Tomorrow’s line-up is the interesting one with a panel discussion featuring ECB Lagarde, Fed Powell, BoE Bailey and BoJ Ueda. At yesterday’s opening reception and dinner, IMF first deputy managing director Gopinath (former chief economist) presented those attending with three uncomfortable truths for monetary policy. The first is that inflation is taking too long to get back to target. The second is that financial stresses could generate tensions between central banks’ price and financial stability objectives. The final one is that going forward, central banks are likely to experience more upside inflation risks than before the pandemic. Eco data today include US durable goods orders, house prices, Richmond Fed manufacturing index and consumer confidence. We fear that their market-moving potential will be rather low given this week’s back-loaded events (apart from Sintra EMU CPI and US PCE deflators). The market path of least resistance remains the risk-off dynamic.
News and views
The British Retail Consortium (BRC) reported that the rise in UK shop prices slowed in June to 8.4% from 9% In May. Monthly price growth decelerated from 0.5% M/M to 0.2% M/M. Food price inflation remained at 0.5% M/M but eased from 15.4% Y/Y to 14.6%. Non-food prices were unchanged for the month and decelerated from 5.8% to 5.4% Y/Y. The CEO of the BRC said that “if the current situation continues, food inflation should drop to single digits later this year.” The BRC press release also indicates that if global supply chain costs continue to fall, we may now be past the peak of price increases. However with most households needing to save money, purchasing behavior for the rest of this year is still likely to shift towards essential needs with discretionary consumption being deprioritized or delayed.
Yesterday, economic sentiment indicators published in Hungary and the Czech Republic continued to indicate ongoing soft economic conditions. Hungarian GKI economic sentiment dropped from -16.1 to -20.4. Business confidence dropped from -4.7 to -118, the lowest level since November 2020. Confidence in the future dropped in all four sectors surveyed (industry, construction, trade and services). According to GKI, consumer confidence ‘improved’ slightly from -48.5 to -44.8, but remains at historically low levels. In the Czech republic, the composite confidence indicator also declined from 1.4 to -2.6. Business confidence slowed from 6.9 to 2.2. Indices declined in the four subcategories as well. Consumer confidence declined slightly further from -20.3 to -21.8. Despite soft eco data published yesterday, local currencies continued to perform well with the forint strengthening close to the cycle peak (EUR/HUF 369). Also the Czech korona s strengthened from 23,73 to close near 23.635.
