Markets

After digesting this morning’s Chinese growth figures which dampened risk appetite, markets awaited today’s ECB meeting and US data. The latter consisted of June retail sales beating expectations across all different measures (core and headline). The control group, considered a proxy for private consumption in GDP, printed a 5.6% m/m increase (4% expected), following a sharp rebound in May of 10.1%. Interestingly, nonstore retailers (i.e. online shopping) printed the first decline since the pandemic outbreak. Weekly jobless claims, however, disappointed by barely declining from 1310k to 1300k (1250k expected). Continuing claims fell at a slower pace (from a downwardly revised 17 730k to 17 338k). Turning to European monetary policy, the ECB kept rates as well as the size and modalities of its APP (€20 bln per month and an additional €120 bln big envelope) and PEPP (€1 350 bln) unaltered. Asked if the latter would have to be completely used, Lagarde reminded the programme’s dual purpose: addressing fragmentation risk and keeping the monetary policy stance very easy. The ECB’s baseline scenario thus assumes both full and flexible use of PEPP. Some ECB governors recently suggested otherwise. The ECB is satisfied with the “very high take-up” of funds under the recently adjusted TLTRO III, which is expected to aid credit flows to businesses and households. Lagarde struck an overall less pessimistic (maybe even cautiously optimistic) tone in her economic analysis. EMU economic activity resumed in May and in line with ECB projections but obviously remains below pre-pandemic levels. Precautionary saving and (expected) income loss weighs on private consumption while uncertainty and an overall weak global growth are a drag on business investment. Risks remain tilted to the downside, meaning ample monetary policy support remains necessary. The ECB also showed concerns about the pandemic increasing the intra-EMU economic divergence. Having the EC recovery proposal – subject to discussion at tomorrow’s special EU Summit – approved is key to address the issue. As expected, today’s policy meeting wasn’t really a market mover. The German yield curve bull flattens against the backdrop of minor risk-off. Yields decline 2.5 bps at the 10-yr tenor. Peripheral spreads are mixed with Greece (-3 bps) outperforming. Italy’s 1 bp widening masks an intraday turnaround however, a move that occurred after the ECB suggested the PEPP would be fully used. US bond yields slip up to 3 bps (30-yr).

Currency markets traded rather dull today. Nor US data nor the ECB was able to provide clear guidance. EUR/USD oscillated around yesterday’s close at 1.141, probably awaiting tomorrow’s important EU summit. The trade-weighted USD trades an inch higher at 96.17. USD/JPY retakes the 107 level while EUR/JPY finds a more comfortable spot in the 122.4 area. After a minor risk-induced setback this morning, sterling hovered sideways. EUR/GBP nears 0.91. UK gilt outperformance might have weighed on the currency. UK bond yields decline 3 to  4 bps across the curve. Cable edges lower towards 1.255.

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News Headlines

Polish core inflation, which excludes the volatile food and energy prices, rose by 0.7% M/M in June to print at 4.1% Y/Y (from 3.8% May). The outcome was close to market expectations. The National bank of Poland targets inflation of 2.5% with a permissible fluctuation of +/- 1%.EUR/PLN continues to hover within reach of the 4.50 reference.

The Greek central bank today announced its intention to create a ‘bad bank’. The vehicle will have to deal with non-performing loans weighing on the balance sheet of the banks. The bank also expects the proportion of NPLs to rise due to the impact of COVID-19 and as such the management of NPLs is seen as a priority for the Bank.

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