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Sunset Market Commentary


Today’s market headliner was US inflation. June headline CPI unexpectedly accelerated 0.9% m/m to surge to 5.4% y/y (4.9% consensus), up from an already elevated 5% in May. Inflation last seen this high was in July 2008, when it reached a peak before the Great Recession struck. Core inflation also soared with 0.9% m/m, bringing the yearly measure at 4.5%, way above the 4% expected. We need to go back three decades (!) to see similar levels. Food (0.8% m/m) and energy (1.5% m/m) supported the speedier price developments. Regarding the drivers of core inflation, we notice the continued extraordinary upward price pressures in used cars and trucks of a whopping monthly 10.5%. This alone accounted for one third of the CPI gain. Used cars are extremely popular to both companies and consumers since both decided to skip queues for new cars due to the global chip shortage. Travel and other categories related to the reopening of the economy also delivered their fair share to the June CPI figure. The monthly advances were even strong enough to compensate for the fading base effects that have benefited headline CPI up until May.

The US data, which also showed NFIB Small Business Optimism recover further from 99.6 to 102.5, reinforced the earlier dollar strengthening. EUR/USD opened around 1.186, gave up intermediate support at 1.1836 to trade at 1.182. The next reference lies at 1.178 before the March 2021 low of 1.1704 but looks safe for now. The trade-weighted DXY bounced off support from the lower bound of the upward trend channel (low 92.2 area) to change hands at 92.69. USD/JPY ekes out a third daily gain north of 110(.44). Fixed income is still digesting what this inflation means for Fed policy going forward. US yields at some point rose more than 3 bps across the curve but especially the long end is having second thoughts. The curve at the time of writing flattens once again with changes varying from +2.4 bps (2y) to -3.7 bps (30y). The US 10y real yield is even back at -1% for the first time since February. Yet, the Fed clearly indicated it would first taper bond buying before ever touching on policy rates when it starts normalizing policy, probably in coming months. Together with the already substantial outperformance of the long end these last few months, it makes current market moves all the more puzzling.

News Headlines

Inflation in the Czech Republic in June rose 0.5% M/M to be up 2.8% Y/Y. Yearly inflation in May touched a short-term peak of 2.9%. Still the June figure was higher than markets and the CNB expected. Core inflation was also higher than the CNB expected, driven by faster growth in prices of goods and services as was the rise in fuel prices. A surprising slowdown in food inflation, which remains volatile, had the opposite effect. The CNB expects core inflation to slow only gradually due to domestic demand pressures and brisk growth in industrial prices abroad. This inflation outlook was at the basis of the CNB starting a genuine rate cycle in June, with follow-up hikes expected later this year and next year. The krona gained modest further ground after the CPI data release. EUR/CZK trades near 25.64.

According to Bloomberg, Polish central bank member Grazyna Ancyparowicz in an interview said that, if it’s necessary to help the government, for example by buying bonds there is no limit for such purchases. The central bank sees the QE program as open ended in case the bank has to respond to another wave of corona lockdowns hampering the economy. Even as the MPC is divided on how the handle current rise in inflation, the zloty stays in the defensive as the majority of the MPC maintains a wait-and see approach. A stronger dollar and an indecisive risk sentiment are weighing on the Polish currency too. EUR/PLN is at risk of breaking beyond the 4.554 resistance.

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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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