Markets
Markets today had to work through a heavy data calendar. Despite the conflict in the Middle East, the EMU economy showed resilience, with preliminary Q2 GDP growth at 0.4% Q/Q and 1.0% Y/Y. However, no expenditure breakdown is available yet. German Q2 growth at 0.2% Q/Q and 0.9% Y/Y also was better than expected (including an upward revision of Q1 growth). July German HICP inflation at 0.9% M/M and 2.8% Y/Y was close to expectations. Domestic core inflation slowed to 2.4% Y/Y from 2.5%. Spanish GDP growth remained strong (0.7% Q/Q, 2.7% Y/Y). Also here, HICP inflation at -0.1% M/M and 3.8% Y/Y was only marginally higher than expected. These data at least should keep the debate on a September ECB rate hike alive. In the US, the preliminary Q2 GDP at first sight disappointed at 1.5% Q/Q. However, personal consumption (3.2%) and gross private investment remained solid. It was mainly inventories and net exports contributing negatively. Price deflators for June were close to expectation (Headline 3.7% from 4.1; core 3.3% from 3.4%). Jobless claims remained low at 197K. After all the data were no big market movers. Yields apparently still elaborated a bit on yesterday post-Fed curve repositioning. Both US and German curves steepened (US 2-y -6.0 bps, 30-y +0.3 bp, with the latter still bumping against the highest levels since 2007 (currently 5.20%). Despite still elevated uncertainty regarding the conflict in the Middle East, Brent oil currently trades again slightly below $90 p/b. Post Fed, the dollar remains a bit in the defensive (EUR/USD 1.1475; DXY 100.7). The yen at the time of writing sharply gains (USD/JPY 160 area). Intervention? (speculation). Despite plenty of global and sector related uncertainty, equities even rebound (Eurostoxx 50 +1.45%; Nasdaq even +2.35%).
The Bank of England as expected left its policy rate unchanged at 3.75%. However, the decision was taken with a 6-3 split vote. Three members voted to increase the policy rate by 25 bps (7-2 vote in June). The MPC evidently was aware that high volatility in energy prices highly complicated the assessment on inflation and growth. Inflation has fallen to 2.6%, but is expected to rise again later this year due to higher energy prices filtering through. The base scenario sees 3.2% in October/November, before cooling down next year. Still the MPC sees little evidence so far of second round effects. Loose labour market conditions and higher interest rates faced by households and businesses than prior to the conflict, will also act to reduce inflation. The BoE stands ready to act as necessary, but for now judges that it is appropriate the keep the policy rate unchanged. The market apparently saw the MPC assessment as an indication that the bank still wants to avoid a degree of tightening that would unnecessarily slow growth. The UK yield curve steepens with the 2-y declining 11.0 bps. The 30-y trades little changed. Money markets currently see about 30% of a 25 bps hike in September. Early November is 85% discounted with cumulative 50 bps seen by Spring next year. Even so, the reaction of sterling was very modest. EUR/GBP saw a recent rise, but still trades near 0.878.
News & Views
Statbel reported. Core inflation (ex-energy products and unprocessed food) stood at 3.13%, compared to 3.04% in June. Focusing on some sub groups, energy inflation was 10.59% Y/Y, compared to 10.31% in June and 11.20% in May. Electricity prices rose 2.7% M/M and at 7.9% Y/Y, from 6.2% last month. Natural gas prices decreased 1.7% M/M to be up 10.3% Y/Y. Services inflation went from 5.10% to 5.17%. Inflation for rents eased from 3.38% Y/Y to 3.21%. Food price inflation (including alcoholic beverages) stands at 0.27% Y/Y (was 0.06%). On a monthly basis, most significant price increases were registered for plane tickets, electricity, holiday villages and camping sites, hotel rooms, motor fuels, meat, banking services and maintenance products. Natural gas and package holidays had a decreasing effect on the index. The first estimate for European HICP inflation amounts to 3.5% Y/Y.
In the CEE region, the Czech Republic and Hungary reported preliminary Q2 GDP estimates. Czech GDP growth at 0.4% Q/Q and 2.0% Y/Y (from 0.2% Q/Q and 2.2% in Q1) was softer than expected. The Statistical Office indicated that quarterly growth was positively influenced by a rise in final consumption expenditure and the international trade balance. Gross capital formation had a negative impact. In a valued added perspective, quarterly growth was supported especially by industrial activity. Most subsectors of services activities also performed well. Employment growth was reported at 0.2% Q/Q and 0.9% Y/Y. For Hungary, preliminary (seasonally adjusted) Q2 growth was 0.4% Q/Q and 1.6% Y/Y. YTD growth amounted to 1.7%. In a brief analysis, the Hungarian Statistical Office mentions that industry contributed positively while agriculture slowed it. The main contributor to the growth was services, within which especially professional, scientific, technical and administrative activities.
.){kind=link}