Markets
Core bonds rapidly forgot about last Friday’s rebound on the back of a tough trading week. They turned into sell-off mode was once more with the move ignited by UK Gilts following the monthly consumer survey by US bank Citi and polling firm YouGov. It showed that public expectations for 1y ahead inflation increased from 4.7% in May to 5% in June. It triggered a further repricing of BoE rate hikes bets with a 6.25% policy rate peak (compared to 5% currently) now fully discounted by the end of the year. It’s almost a done deal (from a market point of view) that we’ll see back-to-back 50 bps rate hikes at the early August meeting. Long term inflation expectations (5y to 10y) decreased for a fourth consecutive month from 3.5% to 3.3%, the joint-lowest since April 2021 but still far above the UK central bank’s 2% inflation target. UK gilt yields add 11 bps (2-yr) to 1 bp (30-yr) in a daily perspective, further inverting the curve. The UK 2-yr yield sets a new 15-yr high at 5.4% with the UK 10-yr yield (4.43%) approaching the 4.5% resistance area (2022 & 2023 tops). Sterling can’t profit from the interest rate support with EUR/GBP holding steady around 0.86. The UK Gilt sell-off spilled to German Bunds and a lesser extent to US Treasuries. German yields gain 2.5 bps (30-yr) to 7.1 bps (5-y). The EU 2-y swap rate tests last year’s cycle high at 3.96%. US yields increase by up to 2.5 bps at the front end of the curve with two factors holding back a stronger reaction. First thin volumes with the first Monday of summer holiday’s packed between a weekend and a closing day (Independence Day). Second, the release of today’s only meaningful figure (US manufacturing ISM) still ahead of us. EUR/USD flipflopped around the 1.09 big figure. On other markets, we retain a spike in oil prices. Brent crude rises from $75/b to $76.5/b after a statement published by the state-run Saudi Press Agency. It said that the Kingdom will prolong its unilateral oil production cut (1mn barrel/day in place since this month on top of OPEC+ deal) by at least one month, keeping a lid on supply when global demand risks faltering. Russian deputy PM Novak later said that his country will reduce production (and exports) by 500k barrels/day. European stock markets started on a solid footing, copying Friday’s action in the US, but are slipping towards Friday’s closing levels as US dealings are about to start. The EuroStoxx 50 did another failed attempt to take out key resistance at 4400 (2021/2022/2023 top).
News & Views
Swiss inflation slowed slightly more than expected in July, easing from 0.3% M/M and 2.2% Y/Y in May to 0.1% M/M and 1.7% Y/Y in June. Core CPI also dropped further below the 2% barrier, slowing down from 1.9% Y/Y to 1.8%. Prices of food and non-alcoholic beverages rose by 0.9% M/M. Costs for leisure (0.4%) and hotels & restaurants (0.6%) also increased. Prices for several other categories including transport (-0.4% M/M), clothing and shoes (-1.7%), communication and household goods (both -0.2%) showed further easing in the inflationary dynamics. Prices of goods flatlined (0.0%). Services inflation slowed to 0.1% in June. In its June 2023 forecasts, the Swiss national bank downgraded its forecast for Q3 and Q4 2023 inflation to 1.7% and 2% respectively mainly due to lower energy prices and the strong Swiss franc tempering inflationary pressures. However, SNB upwardly revised its 2024 forecast on the risk of second round effects, higher electricity and rent prices and more persistent inflation from aboard. Today’s inflation still can be considered in line with the SNB forecast and keeps the door open for an additional SNB rate hike at the September meeting. The Swiss franc declined after the release of the inflation data, with EUR/CHF currently testing the 0.98 barrier, compared to 0.9765 at the start of trading this morning.
Minutes of the June 22 policy meeting by the Turkish central bank (CBRT) indicated that monetary policy tightening is expected to continue. Recent indicators point to an increase in the underlying inflation trend. Strong domestic demand, cost pressures and the stickiness of services inflation have been the main drivers. The Committee also anticipates that the deterioration in pricing behavior will put further pressure on inflation. Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved. The CBRT previously raised its policy rate from 8.5% to 15%. The Turkish lira is holding near recent lows against the euro (EUR/TRY 28.43) and the dollar (USD/TRY 26.07).
