Markets
Yesterday had little to offer from an economic point of view and that showed in daily trading. Main FI and FX markets traded sideways from the start. US stock markets (up to +0.93% for Nasdaq) parted ways with key European indices (up to -1% lower). Technical elements played in Europe after failure last week to pierce key resistance (4400) in the EuroStoxx 50. ECB members are about to join their US colleagues in the pre-meeting blackout period, but that didn’t hold some back for some last-minute comments. ECB Nagel – German, hawk by nature – stated the obvious by calling the July hike and stuck with the main message that data will decide on the outcome of the September meeting. His personal connotations – “core inflation is very sticky”, “don’t currently see a risk of overtightening” and “too early to declare victory over inflation” – barely conceal his preference though. Bank of Italy governor Visco – Italian, dove by nature – is more hopeful and believes that inflation may drop more quickly than forecast. He assumes that the drop in energy prices will more quickly show in core prices as well. Therefore, he’s wary about doing too much from a monetary policy point of view. ECB Villeroy is still scheduled to speak today and later this week, but on both occasions the topic is non-monetary policy related. The ECB’s Q2 Bank Lending Survey (July 25) is the final piece of key input ahead of the July 27 policy meeting.
Today’s eco calendar contains US retail sales. Consensus expects a 0.5% M/M headline gain and a 0.3% M/M increase for the retail control group (used as proxy for consumption calculations in GDP). We don’t expect retail sales to have a big market impact following final pre-Summer lull 2-way positioning at the start of the month. Traded volumes are shrinking fast and risk-reward it’s better to wait the outcome of next week’s ECB/Fed policy meetings. In this scenario, EUR/USD 1.1274 resistance (62% retracement on 2021-2022 USD rise) should theoretically hold, but risks if any are clearly for a sooner break higher. EUR/GBP moves further away from the low 0.85 support area (currently 0.86) awaiting tomorrow’s inflation numbers which should seal the (discounted) 50 bps BoE rate hike in August. On a very first small positive note, a Lloyds survey showed that UK food and drink manufacturers cut prices in June for the first time in more than 3 years.
News and views
The NY Fed’s SCE credit access survey showed that the overall rejection rate for credit applicants increased to 21.8% the highest level since June 2018. The increase was broad-based across all age groups. The rejection rate for auto loans increased to 14.2% from 9.1% in February, a new series high. It also increased for credit cards, credit card limit increase requests, mortgages, and mortgage refinance applications. The average reported expectation of applicants that a loan application will be rejected increased sharply for all loan types. It rose to 30.7% for auto loans (series high), 32.8% for credit cards, 42.4% for credit limit increase requests (series high), 46.1% for mortgages (series high), and 29.6% for mortgage refinance applications.
Minutes of the Reserve Bank of Australia’s (RBA) July policy meeting indicated that the MPC discussed both the option to raise the policy rate further by 25 bps or holding the cash rate unchanged at 4.10%. The case to increase the cash rate further was centered on observations that inflation was forecast to remain above target for an extended period and the risk that this timeframe would be extended without further monetary policy tightening. The labour market remains very tight, notwithstanding some easing in conditions recently. Supporting the case for leaving the policy rate unchanged, members noted that monetary policy had been tightened considerably and rapidly over the prior year and that the stance of monetary policy was clearly restrictive. Mortgage interest payments (as a share of household disposable income) were around a record high and will rise further. The MPC saw considerable uncertainty about the resilience of household consumption. The MPC also pondered the risk that the unemployment rate would rise beyond the rate required to ensure inflation returns to target in a reasonable timeframe. The MPC concluded to leave the policy rate unchanged an reassess the situation at the August meeting. Some further tightening may be required but this depends on how the economy and inflation evolve.
