Markets
The highly awaited panel debate at the ECB Sintra forum between Fed Chair Warsh, ECB president Lagarde, BoE governor Bailey and Bank of Canada governor Macklem didn’t yield much new insight on the short-term dynamics of monetary policy of the participants’ central banks. BoE Governor Bailey mainly focused on low UK growth even as inflation stays above target for now. Fed Chair Warsh reiterated he prefers a smaller balance sheet but this will take quite some time. He also kept his ‘communication commitment’ to avoid any forward guidance on upcoming Fed policy steps. Even so, he saw inflation expectations and inflation risks coming down recently, but at the same time reiterated the commitment to deliver on its price stability mandate. ECB Lagarde assessed that risks to inflation and growth probably now are a bit more balanced. The comments can be understood as mildly dovish, but with little specific ‘guidance’ on (the timing of) upcoming policy steps. Yields eased slightly off the intraday highs after the debate, but daily changes in the end were small. US yields rose between 0.2 bps (2-y) and 1.9 bps (30-y). Regarding the US data, the ADP June private job growth at 98K was below consensus. The US manufacturing ISM also eased slightly more than expected to 53.3 from 54. The prices paid subindex eased to 73 from 82.1. Even so, the market reaction was very limited with the focus on today’s US payrolls. The German yield curve slightly steepened (2-yr -1.6 bps; 30-yr +3 bps). The oil price continues its decline with Brent currently trading below $71/b but the direct impact on markets is becoming a bit less pronounced. Equities are still swinging between ‘hope and doubt’ with the Nasdaq losing 0.66%. The Eurostoxx 50 also ceded 0.72%. The dollar slightly outperformed with DXY closing north of 101. EUR/USD closed at 1.1377 (from 1.1422 at the open). After setting a new multi-year high early in the session, USD/JPY closed off the intraday top (162.6). After several rejected tests over the previous year, EUR/GBP dropped below the 0.86 range bottom, with additional stop-loss momentum pushing the pair to a close of 0.857.
US payrolls are published one day earlier than the traditional Friday release as US markets are going into a long weekend due to Independence Day. After three months of strong job growth, markets now expect payrolls growth at 113k (from 172k in May). Even so, this is a growth rate that should be able to at least balance the unemployment rate (expected unchanged at 4.3%). Average hourly earnings are expected at 0.3% M/M and 3.5% Y/Y. A solid figure confirms the picture of US eco resilience, and makes it easier for the Warsh Fed to act on its price stability commitment. With only 30% probability of a 25 bps Fed step discounted in July and 80% in September, the market still has some room to ‘frontload’ in case of a strong report. Such a scenario should be USD supportive. In EUR/USD, the ST low at 1.1325 is still within reach.
News & Views
Sources familiar with the matter told Reuters that Japanese officials may abandon the habit of telegraphing interventions or the risk of them to markets. Such “ambush intervention tactics” – as Reuters describes it – is considered a more targeted campaign to abruptly squeeze out speculators instead of giving them a heads up that allows them to orderly unwind their positions. By eliminating this possibility, Japan increases market uncertainty and therefore risks of shorting the yen. The Reuters report comes amid JPY exploring new 40-year lows against the US dollar. Officials have indeed remained more quiet than in the recent past on the matter. They may have been biding their time going into today’s US payrolls, hoping that it would strip the dollar some of its momentum. The Reuters report, however, offers a different perspective on the recent relative silence. USD/JPY takes a small step back from the recent multidecade highs to trade around 162.4.
South Korean inflation decelerated from 0.5% to 0.1% m/m in June but pushed the annual figure higher nonetheless, from 3.1% to 3.2% in June. Core CPI (ex. food and energy) matched May’s 2.5% compared to the consensus view of 2.6%. That may have been the product of some oil-sensitive services prices (e.g. international airfares and overseas group-tour costs eased in y/y terms from May) that have come off in line with general oil prices. With prices expected to remain above the Bank of Korea’s 2% target for some time and the economy profiting from the AI/semiconductor boom, the central bank is likely to hike the policy rate from the current 2.5% several times in coming months. The Korean won trades slightly lower around USD/KRW 1554.75, a historically weak exchange rate.
