Markets
Reaccelerating European core inflation in June came as no surprise to markets last Friday. German yields went up to 3.8 bps (30-y) lower into the weekend even as services inflation (5.4% y/y) bounced to a new series high. US data included personal income/spending and the PCE deflators but failed to inspire US investors. Yields dipped before leaving the intraday lows again in the final trading hours. Daily changes amounted to +3.7-4 bps at the front end of the curve and -0.2 to -3.9 bps at the longer maturities. Stocks ended the first half of the year on excellent footing. European equities rallied 1%, bringing the EuroStoxx 50 close to its YtD/cycle highs. Wall Street added 0.84-1.45% with the Nasdaq once again outperforming. The S&P500 finished at the highest level since April 2022. This bright risk mood pressured the US dollar. EUR/USD in one go erased the Thursday jobless claims losses, rising from the 1.086 area to back above 1.09. The DXY eased sub 103. The yen’s decline halted. USD/JPY hit resistance at 145 – the level at which Japanese officials intervened in September last year.
This morning’s Asian session is extremely quiet. Stocks in the region enter the second half of 2023 in good spirit. Japan rallies up to 1.6% with a more than decent Q2 Tankan supporting the move higher. The Japanese yen fails to profit though. Sentiment among large manufacturers improved from 1 to 5 with the outlook for the sector showing a bigger-than-expected advance, from 3 to 9. Non-manufacturers also showed more confident. The index gauging both the present and the future moved to pre-pandemic highs (23 and 20 respectively). Japanese businesses expect CPI inflation in five years at 2.1%. Chinese regulators fixed the yuan again stronger than expected in growing signs of unease with the weak currency. USD/CNY is trading close to its recent high around 7.24. Other dollar pairs struggle for direction. DXY and EUR/USD hover around Friday’s closing level. Core bonds trade with an upward bias.
Today’s economic calendar won’t break the Summer stalemate. It doesn’t help that the US is celebrating Independence Day tomorrow either, probably keeping many (American) investors sidelined today as well. The manufacturing ISM is due for release but we don’t expect it to have a significant impact on trading. Consensus is for a minor improvement/bottoming out from 46.9 to 47.2. Attention later this week shifts to the Australian central bank policy meeting tomorrow (status quo expected but with outside chance of a follow-up rate hike), FOMC June meeting minutes and the ECB consumer expectations survey on Wednesday, ADP employment, JOLTS and the services ISM on Thursday and finally the payrolls report on Friday.
News and views
Czech National Bank governor Michl in an interview by Pravo newspaper said this weekend that the central bank must keep fighting inflation by holding rates at their peak level for longer. If inflation proves to be more persistent, the CNB could even raise them again especially in combination with a revival in demand. “We’re not thinking about rate cuts at all”. In the base scenario, tight monetary policy, a strong koruna and a drop in consumption should push inflation back to the 2% target next year from 11.1% Y/Y in May. Michl called out for government support, labelling fiscal policy the biggest inflationary risk in the economy along with a potential wage-price spiral. Czech money markets currently start discounting the start of a cutting cycle from early 2024 onwards and attach a 0% probability to another rate hike this year. EUR/CZK at 23.75 trades near the middle of this year’s range (23.20-24.20). Historically, CZK only briefly traded as strong during 2008.
Swedish state-owned lender SBAB published its monthly house price indicator. Prices rose by 1.1% M/M overall with the non-seasonally adjusted housing price index largely unchanged since February. Prices are now 13% lower than in April last year. “Housing prices, and especially the price of apartments, continue to show remarkable resilience against significantly rising interest rates,” SBAB chief economist Boije said in a statement. “However, it may be deceptive as mortgage rates will continue somewhat higher and many housing co-ops will have to raise monthly fees.” The Swedish krone trades historically weak at EUR/SEK 11.75. The Riksbank raised its policy rate last week by another 25 bps to 3.75%, but markets judge the effort and the central bank’s future commitment as too little, too late.
