Markets
Markets this week are captured by an (admittedly mild) ‘by default risk-off bias’. The EuroStoxx 50 again cedes 0.35%. S&P opens 0.75% lower. The US being the exception to the rule, forward looking indicators in most major economies point to ongoing sluggish growth. At the same time there are few potential tools to restart a positive growth spiral. Monetary policy in the foreseeable future has to no role play in bailing out growth. In most developed countries this is also the case for fiscal policy. Higher oil prices are at risk of putting an additional burden on demand. China also isn’t in a position to play any role as locomotive for growth as it often did in the past. Today’s downward revision of EMU Q2 growth (from 0.3% Q/Q first estimate to 0.1% Q/Q) definitely is old news, but adds to anecdotic evidence. A lower contribution of net exports highlights the meagre underlying internal growth momentum. US jobless claims was the only ‘timely’ economic data series in for release. The outcome…? You guessed it. Claims declined further from 229k to 216k. It is a minor topic when the Fed will make up its mind on September 20. Next week’s August inflation data have the final say. Even so, it helped to block corrective setback in US yields (currently changing 1-2 bps across the curve). German bonds outperform with yields easing up to 4 bps (5-y). US economic outperformance combined with a risk-off make further USD gains a ‘no-brainer’. DXY jumps north of the 105 big figure. EUR/USD is at risk of losing 1.07. A bit remarkable, USD/JPY (147.17) fails to sustainably break recent peak levels in the 147.80 area. A soft BoE Decision Maker Panel survey (cf infra) triggered further Gilt outperformance. EUR/GBP briefly tested the 0.86 area, but with no follow-through gains yet (0.8584 currently).
In Central Europe, investors are still trying to assess the impact of yesterday’s ‘unthinkable’ 75 bps rate cut of the National Bank of Poland (NBP). The zloty is ceding further ground as NBP governor Glapinski defends its move at the press conference. EUR/PLN jumps to 4.62 from 4.57 this morning. The fall-out on other currencies in the region is a bit mixed. Maybe a bit surprising, the Czech krona is feeling a bigger impact compared to the Hungarian forint. At EUR/CZK 24.39, the Czech currency is testing the weakest levels since December last year. The forint shows better resilience with EUR/HUF returning below to 390 mark (EUR/HUF 387.75). For now, the NBP rate cut didn’t change expectations on the MNB’s or CNB’s policy trajectory for the remainder of this year in a profound way (CNB first 25 bps rate cut in Q4, MNB policy rate near 11.00% year-end). It’s a bit contradictory, but any further currency losses due to the NBP decision only complicates any MNB and CNB easing, as it might revive imported inflation.
News & Views
In the Bank of England’s monthly survey, UK companies in August said they expect to raise output prices by 4.4% over the next year. That’s down from 5.5% in July and sharply lower than the 6.7% peak in July 2022. It’s the slowest pace since November 2021. The BoE also started polling CPI inflation expectations since May of last year. Companies see consumer prices rising 4.8% next year and 3.2% three years ahead, down from 5.4% and 3.3% respectively in July. BoE Governor Bailey yesterday during his appearance before parliament said these inflation expectations “shapes a lot of our thinking about the direction of policy”. It shouldn’t come as a big surprise then that money markets have lowered bets for a 25 bps hike at the September meeting. They also no longer fully price in a total of 50 bps in additional tightening (to 5.75%). UK gilt yields lose more than 6 bps at the front end of the curve, outperforming global peers. An important caveat in the BoE’s survey of today, though, is wage growth. Companies’ expectations for the next 12 months remained unchanged at 5%. Combined with the share of firms reporting that hiring has become “much harder” having increased again (26.2%, up from 22.5%) suggests ongoing labour market tightness.
Germany’s Ifo institute today confirmed its June forecast of a 0.4% contraction this year. Unlike previously though, it does not expect a recovery in the second half of 2023 any longer. The reason it then didn’t lower its growth forecast is due to an upward revision from the statistics office to Q1 growth (-0.1% vs -0.3 prior). For 2024, GDP should expand 1.4% (-0.1 ppt compared to its previous forecast) while rising 1.2% in 2025. Private consumption is the bright spot. It forecasts a gradual recovery in 2023H2 amid rising disposable incomes & purchasing power due to easing inflation. Prices pressures are seen slowing to 6% in 2023 before falling to 2.6% and 1.9% in the two years after. Ifo’s head of forecasts said they expect the ECB’s first rate cut only at the end of next year.
. UK gilt yields lose more than 6 bps at the front end of the curve, outperforming global peers. An important caveat in the BoE’s survey of today, though, is wage growth. Companies’ expectations for the next 12 months remained unchanged at 5%. Combined with the share of firms reporting that hiring has become “much harder” having increased again (26.2%, up from 22.5%) suggests ongoing labour market tightness.){kind=link}