Markets
US and European data again parted ways yesterday. EMU data confirmed recent evidence of a loss of momentum in activity. Germany Ifo Business climate worsened for the third consecutive month. The headline index slipped from 88.6 to 87.3, mainly due to a worsening current assessment (91.3 from 93.7). Expectations eased only from 83.8 to 83.5 on a slightly better/less worse assessment in the services sector. The ECB quarterly lending survey showed that standards for credit to enterprises and households tightened further. This will probably continue in Q3, albeit at a more moderate pace. Credit demand also fell sharply. The report indicates that ECB tightening is filtering through to the economy and is relevant input for tomorrow’s ECB decision. US data (S&P Corelogic house prices, Philly Fed nonmanufacturing activity and especially Conference Board consumer confidence) all printed better/stronger than expected. Consumer confidence even reached the best level since July 2021. Still, with the Fed and the ECB meetings looming, the impact of the data on interest rate markets was limited and short-lived. In the end, US and German yields both gained marginally, but no more than 2.5 bps. Equities stay in consolidation modus (S&P +0.28%, Eurostoxx +0.19%). Eco divergence helped the dollar to gain marginally against the euro (EUR/USD close 1.1055), but the greenback lost against the yen (USD/JPY close 140.9). Sterling had a good run. Better than expected CBI confidence maybe helped. EUR/GBP finally forced a technical break back below 0.86 (close 0.857).
This morning Asian equities are trading mixed with the likes of Japan, China and Korea ceding ground. Australia outperforms on softer than expected CPI data (cf infra). US Treasuries and the dollar are little changed as markets are counting down to this evening’s Fed decision and Powell’s press conference. Considering the June median dots for a peak in the target range of 5.50/5.75% and Fed comments over previous month, anything different from a 25 bps hike would be a big surprise. Even with the latest payrolls and CPI marginally softer than expected, other data suggest the US economy is holding resilient and that no recession in imminent. In this context, we expect Powell to keep the door open for a further step in September (or later) depending on the data. For markets, such a scenario shouldn’t be a big surprise. Even if Powell holds a hawkish tone, it won’t be easy for the 2-y and 10-y yield to surpass big figure yields at 5.0% and 4.0% respectively. Such a test/move probably needs strong payrolls (next week) and/or higher than expected inflation data (August 10). Given recent relative data evidence (especially compared to EMU), the dollar might stay well bid, with EUR/USD 1.1012 (22 June top)/1.10 a first next reference.
News and views
The Hungarian central bank (MNB) yesterday again cut the overnight tender rate by 100 bps to 15%. The convergence with the base rate, currently 13% and deemed enough to manage fundamental inflation risks, continues gradually as long as the improvement in risk perceptions vs Hungarian assets (ie. the forint) persists. The MNB expects the economy to grow a mere 0-1.5% this year as real wages decline, corporate costs rise and consumers remain cautious. Momentum should pick up though in the second half of 2023 amid rising real wages due to falling inflation. Growth in 2024 and 2025 is seen at 3.5-4.5% and 3-4% respectively. Inflation would decrease further at a rapid pace because of tight monetary policy, falling global commodity prices and declining domestic consumption. Yearly CPI is projected at 16.5-18.5% for 2023, 3.5-5.5% for 2024 and 2.5-3.5% for 2025. The forint yesterday declined on a net daily basis though losses stayed orderly. EUR/HUF rose from 377.87 to 379.84.
Australian Q2 CPI missed estimates by a slight margin. The headline figure rose 0.8% q/q to be up 6% y/y compared to a 1% and 6.2 % forecast and down from Q1’s 1.4% and 7%. The trimmed mean, a gauge smoothing volatile items and closely watched by the Reserve Bank of Australia, also fell short of consensus, coming in at 0.9% q/q and 5.9% y/y (down from 6.6% in Q1). The RBA meets next week. It kept rates steady in July at 4.10% and today’s data flipped market betting from a 50% chance for a 25 bps rate hike to just 20%. Arguing for additional tightening, though, is Australia’s strong and tight labour market which pushed the unemployment rate to a historically low 3.5% in last week’s June report. In this respect, it is worth nothing that services inflation, closely related to the labour market and wage gains, rose to the highest since 2001, 6.3%. Australian swap yields tumble up to 14 bps at the front end of the curve. The Aussie dollar hit an intraday low of AUD/USD 0.673 before paring losses to 0.676 currently.
. US Treasuries and the dollar are little changed as markets are counting down to this evening’s Fed decision and Powell’s press conference. Considering the June median dots for a peak in the target range of 5.50/5.75% and Fed comments over previous month, anything different from a 25 bps hike would be a big surprise. Even with the latest payrolls and CPI marginally softer than expected, other data suggest the US economy is holding resilient and that no recession in imminent. In this context, we expect Powell to keep the door open for a further step in September (or later) depending on the data. For markets, such a scenario shouldn’t be a big surprise. Even if Powell holds a hawkish tone, it won’t be easy for the 2-y and 10-y yield to surpass big figure yields at 5.0% and 4.0% respectively. Such a test/move probably needs strong payrolls (next week) and/or higher than expected inflation data (August 10). Given recent relative data evidence (especially compared to EMU), the dollar might stay well bid, with EUR/USD 1.1012 (22 June top)/1.10 a first next reference.){kind=link}