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Sunset Market Commentary


The Bank of England unanimously decided to keep its policy rate as expected unchanged at 0.1%. Outgoing BoE chief economist Haldane for a second straight meeting voted in favour of lowering the target for the stock of asset purchases by £50bn to £895bn. For a second straight meeting, he’s isolated on the issue. Developments in global GDP growth since the BoE’s May Monetary Policy Report have been somewhat stronger than anticipated. Staff decided to revise up expectations for the level of UK GDP in Q2 2021 by around 1.5% as restrictions on economic activity have eased. However, there is still spare capacity in aggregate in the economy at present. UK CPI inflation in May rose above the 2% target in almost two years and is expected to pick up further and even likely to exceed 3% for a temporary period. The BoE still believes that growth and inflation will eventually fall back to normal levels, though upward price pressure might persist somewhat longer than expected. The bar to start monetary policy normalization remains high despite the slightly more bullish economic assessment. The MPC doesn’t intend to tighten policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. The next Bank of England Monetary Policy report will be released on August 5. With asset purchases forecast to run until the end of the year and with key Fed/ECB meetings only scheduled in September, the BoE will probably try to fend off creating any policy normalization bets to the November meeting. We expect governor Bailey and co to prefer to err on the side of caution in coming months. Some GBP-bulls hoped for a proactive attitude by the BoE. EUR/GBP slipped to the lowest levels since early April in the run-up to the BoE, but investors slimmed those GBP bets afterwards. EUR/GBP rose from the 0.854 area towards 0.859.

The post-FOMC stalemate persisted on main other markets. European stock markets continue their rebound, gaining up to 1%. Changes on the US yield curve range between -1 bp and +1 bp with the belly of the curve underperforming the wings. Absolute yield changes are even smaller on the German curve though that shows a marginal steepening move. The US dollar has a minor downward bias. The trade-weighted greenback currently changes hands near 91.70 with EUR/USD exploring the 1.1950 zone. Today’s eco number included better than expected German Ifo business sentiment, mixed US durable goods orders and disappointing weekly jobless claims. None of them managed to break the deadlock.

News Headlines

Czech confidence data indicated a further improvement of economic conditions. Consumer confidence rose from  -4.5 in May to -2.0 in June. Business confidence improved from 11.6 to 16.8. The improvement was noticed across all subsectors of the economy (Industry, trade construction and services). The data support the case for a further reduction in monetary policy stimulus after the CNB started its hiking cycle yesterday. Other data showed car production, a key economic sector in the country, rebounded 40.1% in the January-May period. Even so, the production remained 9.9% below the level reached in 2019. For now, the koruna fails to extend post-CNB gains. EUR/CZK is changing hands in the 24.44 area.

In its quarterly inflation report, the Central bank of Brazil raised it growth outlook of the economy from 3.6% in March to 4.6% currently. The Bank sees close to economic stability in Q2 followed by growth throughout H2. Economic activity in services is expected to improve from 2.8% to 3.8%, for agriculture the bank sees 2.5% from 2.0% Activity in the industry is expected to expand 6.6% instead of 6.4%. The bank expects inflation at 5.8% in 2021 and 3.5% in 2022. The real extends gains below USD/BRL 5.0 level after the bank last week raised its policy rate by 0.75% to 4.25%, with further tightening to come.

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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