Markets
The countdown to a Fed decision most often is a long-drawn yawn with eco data often ignored. Today, even these ’to be ignored‘ data were almost completely absent. US new home sales, to be published after finishing this report for sure won’t break the stalemate. Uncertainty on growth and how much further tightening still to expect from the Fed and the ECB combined with mixed results caused equity investors to stay at bay. European stocks underperform with the EuroSroxx 50 losing 1.5%+. US indices opened about 0.5% lower. The risk-off hardly any impact on US Treasuries. Except for a benchmark change in the 5-y (-2.5 bps), US yields are changing less than 1 bp in a daily perspective. Despite the broader risk-off and recent unconvincing EMU data, German yields ‘rebound’ between 3 bps (30-y) and 5.3 bps (5-y). The German 2-yield (3.10%) is supported by the 3.0% big figure. The 10-y (2.46%) is locked in a tight range near the 2.5% pivot. 10-y Intra-EMU spreads also show only small moves going into tomorrow’s ECB meeting. Greece continues to outperform (-4 bps). In FX markets, the dollar is losing modestly after a solid data driven comeback over the previous 10 days. DXY trades near 101.2. EUR/USD hovers close to 1.1070 from an open near 1.105. The yen outperforms (USD/JPY 140. from an open at 140.9). The risk-off helps, but investors maybe also stay cautious on yen shorts going into Friday’s BoJ meeting. Is there a (small?) chance for the BoJ tweaking its yield curve control. Even if it’s only a tail-risk, the impact if it happens could be big, including for the yen. Quite a divergent performance of CE currencies. The Czech koruna (EUR/CZK 24.05) and the especially Polish zloty (EUR/PLN 4.42) are well bid. The zloty even nears the YTD strongest against the euro. The forint is fighting an uphill battle (EUR/HUF 383.5 from an open below 380). MNB yesterday for the third consecutive month cut the O/N ‘emergency’ depo tender rate by 100 bps to 15.0%. Some forint investors apparently see a declining premium as changing the risk-reward balance.
The main dish for markets of course is the Fed decision and Powell’s press conference. As the MPC in June raised the dots signalling a peak in the target range to 5.50/5.75% and considering Fed comments since then, anything different from a 25 bps hike would be a big surprise. Even with latest payrolls and CPI slightly softer than expected, other data suggest that the US economy is holding resilient and that no recession in imminent. Demand probably stays too strong for the Fed to already feel comfortable that (core) inflation will sustainably return to 2%. In this context, we expect Powell to keep the door open for a further 25 bps 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 to surpass big figures yields at 5.0% and 4.0% respectively. Such a test probably needs solid payrolls (next week) and/or higher than expected inflation (August 10). Given recent good US data (especially compared to EMU), the dollar might stay well bid post-Fed, with EUR/USD 1.1012 (22 June top)/1.10 first next reference.
News & Views
Credit rating agency Fitch raised Brazil’s long-term foreign currency debt rating to BB from BB-, two levels below investment grade. It retains a stable outlook. Fitch is referring to a better-than-expected macroeconomic and fiscal performance amid successive shocks in recent years, proactive policies and reforms for the upgrade. It acknowledges lingering political tensions and said the new leftist Lula government advocates a shift away from the liberal economic agenda of the past governments. But Fitch expects pragmatism and the country’s broader institutional checks-and-balances should prevent radical policy changes. New fiscal rules, even as some have yet to be approved, and major tax reforms should result in an improvement in the in 2023 worsened fiscal position, Fitch said. Underpinning Brazil’s rating today are its large and diverse economy, deep domestic markets and high per-capita income. A flexible exchange rate creates shock-absorption capacity and the country disposes of robust international reserves and a sovereign net external creditor position. Risks mainly arise from high government debt, fiscal rigidities, weak economic growth potential and relatively low governance scores. The Brazilian real reacts stoic to Fitch’s decision. From a broader perspective though, the currency is trading at its strongest level since June 2022. USD/BRL is changing hands around 4.74.
