Markets
The ECB kept policy rates unchanged at -0.50% and the total size of the PEPP envelope at €1.85tn. The amount of bonds it will buy in the coming quarter will continue to be conducted at a significantly higher pace than during the first months of the year. Lagarde noted that rates have risen further in recent weeks/months which risks leading to a premature tightening of financial conditions given the economic environment. This feels a bit awkward since growth projections were again revised upwardly: 4.6% (+0.6ppt) this year, 4.7% in 2022 (+0.6 ppt) and 2.1% in 2023 (unch.). Risks are now broadly balanced with household savings spent more quickly than expected vs. risks surrounding the coronavirus. Inflation is expected higher as well: 1.9% in 2021 (+0.4 ppt), 1.5% and 2022 (+0.3 ppt). Lagarde went at great lengths to convince everyone of temporary inflation, stressing the upward revisions were the result of rising energy prices and temporary factors (including base effects). What needs to support inflation, is the services sector via wage pressures. The ECB is not seeing much of that because of the slack, she added. By keeping inflation unchanged at 1.4% (and not raising) for 2023, the ECB underpins this temporary narrative with figures. There’s a “but” though and that’s called core inflation. We are seeing some movement [up] there and we will continue to monitor that carefully. That is why core inflation numbers were revised higher as well although they remain far away from its ultimate aim. All this justifies, according to the ECB, continuing PEPP buying at a significantly higher pace. Here, an interesting question from the audience pushed Lagarde into announcing what we dub “implicit tapering”. What about the summer months when liquidity is substantially lower? The ECB will take into consideration seasonal factors, Lagarde said, referring to the PEPP’s flexibility. Lagarde was also forced to admit there were a couple of diverging views with some governors advocating a “formal” slowdown. Markets reacted stoic. German yields reversed an initial 2bps spike on the brighter economic outlook to eventually trade flat. EUR/USD briefly hunted the 1.22 zone but is changing hands near 1.217. It’s the result of a weaker euro (eg. EUR/GBP again testing 0.86 support) and not so much a stronger US dollar even as US CPI came in stronger than expected. Headline price increases rose 5% y/y (4.7% expected) and core readings accelerated to 3.8% y/y (3.5% expected). This is supporting US yields somewhat albeit only temporary. A 2-3 bps rise in yields reversed as US markets started joining. Clearly, the higher inflation does not convince markets that the Fed will start the taper debate. We’ll know more about that next week.
News Headlines
The Basel Committee today published a consultation on the prudential treatment of cryptoasset exposures. While banks’ exposures to cryptoassets are currently limited, the continued growth and innovation in cryptoassets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment. The proposal divides crypto assets into two broad groups. The first consists of certain tokenized traditional assets and stablecoins and would be eligible for treatment under the existing Basel framework. The second group are outright cryptoassets like bitcoin and would be subject to a new conservative prudential treatment including a 1.25% risk weight which in practice means that a $100 exposure in bitcoin would result in a minimum capital requirement of $100.
Czech inflation slowed from 3.1% y/y to 2.9% y/y in May whereas consensus expected a stabilization. The biggest impact came from prices in ‘transport’, where prices of motor cars went up by 6.9% Y/Y and automotive fuels and lubricants by 22% Y/Y. Prices in ‘alcoholic beverages and tobacco’ (+9.8% Y/Y and prices of actual rentals (+1.8% Y/Y) increased as well. Prices of electricity decreased by 3.4% Y/Y and natural gas by 4.7% Y/Y. Prices rose by 0.2% on a monthly basis. The Czech koruna didn’t respond to the data but afterwards set a fresh cycle high near EUR/CZK 25.36.
