Markets
More quotes from ECB governors at the sidelines of the Sintra symposium hit the wires. Germany’s Buba president Nagel keeps his options open for July and September, citing above-target inflation through 2027 and the risk that it may trigger second-round effects. He’s not seeing them currently but it is too early to write it off. ECB Wunsch said he would need to see such second-round effects to tighten monetary policy further. If not, the June hike could suffice. Austria’s Kocher said “The inflation threat hasn’t been completely contained yet, but it has definitely diminished, at least in the short term.” The all in all balanced quotes from the hawks triggered a temporary downleg in European yields. Sub-par inflation numbers, while not a surprise after Germany’s, France’s and Italy’s miss yesterday, reinforced the move. Headline CPI came in at 2.8%, easing from May’s 3.2% on a continued energy price drop (-1.7% m/m) and missing the 3% consensus view. Core CPI decelerated more than expected, from 2.6% to 2.5%. Services inflation fell from 3.5% to 3.2% and non-energy industrial goods inflation printed 0.9%, the same as in May. German front-end yields eventually trade 1.5-4.7 bps higher on the day going into the Sintra panel discussion. US rates add 1.6-3 bps across the curve. The ADP job report (98k) fell short of the 120k employment growth expected but barely left a trace on markets with the more important payrolls on tap tomorrow. UK gilts underperform, pushing rates 3.3-6.3 bps higher in a bear steepener. The US dollar gained against its most important peers. EUR/USD is struggling around 1.14. USD/JPY edges further north to 162.7. DXY moves higher towards the 101.5 area. EUR/GBP briefly fell through the 0.86 area.
The panel discussion between the heads of the ECB, Fed, BoE and BoC marks the end of the ECB symposium. Focus in particular went to Warsh but, as expected, he immediately deflected a question on a potential rate hike in July. He sided with Lagarde’s criticism towards forward guidance in the current more uncertain world, so he refused to give any in an echo to his debut as Fed chair in June. His comments generally held little value as a result. That appeared to disappoint some. US yields swapped gains for losses and the dollar pared its earlier advance. Governor Bailey doubled down on the dovish side, reiterating that the economy is softening and is encouraged by the recent fall in energy prices. His comments weighed more on UK yields than on GBP. ECB’s Lagarde defended the June rate hike but refrained from offering hints going forward. She did say that risks to inflation and growth became a bit more balanced. It was perhaps the only noteworthy comment. Money markets are no longer fully pricing in another hike this year. Front-end European yields wipe out their previous gains.
News & Views
The Czech manufacturing PMI showed output growth accelerating as new orders rose at a faster pace in June. The PMI hit a cycle high at 53.9, up from 52.2 (vs 52.0 consensus). Pre-production inventories were built at a faster rate despite a continued decline in vendor performance. Supplier delays also spurred a steeper rise in backlogs of work. At the same time, inflationary pressures eased from their recent highs though remain well above series averages. Following five successive monthly contractions, and a solid drop in headcounts in May, June data signalled a broad stabilisation in staffing numbers at Czech manufacturers. Finally, businesses remained optimistic for the coming year. Hopes were pinned on stronger demand conditions and expectations of greater geopolitical stability. EUR/CZK is going nowhere at 24.25 today. The Czech 2y swap rate (4.1%) holds above the 4% support area as markets don’t rule out another potential rate hike. CNB deputy governor Zamrazilova yesterday labelled the June move fine-tuning of policy restriction and not the beginning of a reversal toward a cycle of rate hikes.
The Flemish Community launched its second new benchmark deal of the year today, raising €1bn via short 15-yr bond (Mar2041). They already did a 10-yr benchmark (€2bn Jun2036) at the start of the year. Adding funds collected via private placements (also taps of existing bonds), brings this year’s total to €3.95bn. This compares with a total financing need of €8.98bn. Main funding instruments to reach that goal are regular benchmarks (€3-4bn), sustainability benchmarks (€2-2.5bn), private placements (€1-1.5bn) and increased short term funding. Total new funding needs are forecasted to remain constant in the 2027-2030 period at €5-5.33bn. Including bond redemptions results in gross borrowing needs of €6.36bn-6.88bn in 2027, 2028 & 2030 and €7.6bn in 2029.
