Markets
The Bank of England was one of the three central bank highlights today. The Norges Bank and the Swiss National Bank outcomes are in the section down below. Threadneedle Street kept the policy rate unchanged at 5.25% in a 7-2 vote with two members voting for a cut (Dhingra and Ramsden). The policy statement contained little added value with a lot of “yes, but’s”. Following on the opening paragraph, the BoE noted inflation on a headline level falling to 2% in May. Services CPI eased less than expected (5.7%) but this was in part technical and due to volatile items. Key indicators of inflation persistence, while still elevated, have continued to moderate. Q1 GDP turned out stronger than expected and growth will probably top expectations for the first half of this year. But the BoE sees business surveys pointing at a slower pace of underlying growth. The central bank concluded with a statement similar to May that it “will consider all of the information available and how this affects the assessment that the risks from inflation persistence are receding. On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level.” With the next August (1) meeting one being with new forecasts, the stakes are probably higher this time around. To that end it’s worth noting how the 7-2 vote actually hides a three-way internal divide. Back in May, the meeting minutes described the risk assessment made by the seven policymakers in one paragraph, treating them as one group supporting the status quo for shared reasons. Today, however, the pack of seven was split up in a more hawkish team that wants more evidence of diminishing inflation persistence and a neutral team for whom the status quo was a “finely balanced” decision. Risks are that barring a material upside inflation or economic activity surprise, one or more members may soon join Dhingra and Ramsden’s camp. This was probably the reason for the kneejerk drop in UK gilt yields and sterling. Both recovered afterwards though. Yields currently change less than 2 bps across the curve. EUR/GBP ekes out some gains to trade around 0.8455 currently.
US yields trade 3.4 and 5.4 bps higher in their reopening after yesterday’s Juneteenth holiday. Economic data would have suggested otherwise though with weekly jobless claims (238k), housing data and the Philly Fed business outlook indicator all coming in to the downside of expectations. The jury’s out whether to call it a bottoming out. German yields follow in lockstep with similar-sized gains in a news poor session. EUR/USD loses ground towards 1.072 despite a constructive risk environment.
News & Views
After an inaugural 25 bps cut in March, the Swiss National Bank (SNB) today further reduced its policy rate from 1.50% to 1.25%. Markets were highly divided between a cut or an unchanged decision. Inflation has risen slightly since the March meeting (to 1.4% Y/Y in May), but the SNB sees underlying inflation easing owing to somewhat lower second-round effects. The SNB even after today’s rate cut marginally downwardly revised its inflation forecasts (1.3% 2024, 1.1% 2025 and 1.0% 2026), keeping it firmly within the 0%-2.0% price stability target range. The SNB expects Swiss growth to stay moderate in coming quarters (1.0% 2024), but medium term activity should improve gradually, supported by somewhat stronger demand from abroad (1.5% in 2025). The SNB noted that, after a decline earlier this year, the franc increased substantially mainly due to political uncertainty in Europe. This is causing uncertainty about inflation staying elevated. Monetary policy is taking that into account. The SNB remains prepared to be active in the FX market as necessary to keep monetary conditions appropriate. Comments suggest that potential unwarranted currency strength was a factor tilting the balance to a rate cut. The franc declined modestly post the SNB decision. EUR/CHF rebounded from 0.949 to 0.9545 currently.
The Norges Bank today as expected left its policy rate unchanged at 4.5%. Since March, inflation has been a little lower than projected, while unemployment increased as expected. On the other hand, enterprises report improved prospects and it wage growth will be higher than envisaged. This could mean that inflation will be higher than projected. The NB judges that the policy rate is sufficiently high to bring inflation to target within a reasonable time horizon, but that there will be a need to maintain a tight monetary policy stance for somewhat longer than previously projected. The NB now projects to policy rate to stay at current level till the end of the year. The Norwegian krone post the NB decision extended recent gains. EUR/NOK declines from 11.36 this morning to 11.29.
Graphs
EUR/NOK: krone appreciates after Norges Bank extends policy rate status quo to at least the end of the year
EUR/CHF: Swiss National Bank cuts rates to 1.25% with recent CHF strenghtening (probably) having tilted the balance
EUR/GBP: sterling shrugs at today’s Bank of England “yes, but” status quo decision
Nasdaq: opens with new record high with the likes of Nvidia extending its meteoric rise
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