Yesterday, the ‘minimalistic’ ECB approach on policy normalization reversed a cautiously ‘hawkish’ positioning on (European) markets earlier this week. Markets understood that the policy calibration indeed was no real change. At the same time, yesterday’s inaction only laid de groundwork for an open, potentially heated debate within a divided ECB in the run-up to the key December meeting. If data on growth and inflation continue on recent trends, the doves might face a more uphill battle. ECB’s Lagarde today evidently repeated yesterday’s growth supportive assessment. Headlines from an interview with ECB Holmann reminded markets of a different view within the ECB. Whatever, markets didn’t build on yesterday’s dovish setback. With no data on the agenda, there was room for a ‘correction on the correction’. German yields are rising/rebounding between 0.7bp (2-y) and 1.5 bp (10-y). Some other interesting observations. The EMU 10 year swap yield rebounded back in positive territory (0.02%) with recent correction top still very nearby. Yesterday’s soft ECB tone and the reluctance to reduce bond purchases pushed the (German 10-y) real yield to an historic low (-2.09). On the other side of the equation, the 5Y/5Y EMU inflation swap continues griding higher touching the 1.80% level, the highest in more than 3 year and creeping further away from the 1.75% reference that ECB’ Lagarde mentioned at the press conference. The narrowing in intra-EMU spreads also already halted today. US interest rates show a similar picture rising between 0.4 bp (2-y) and 2.5 bp (10-y). The 30-y (+ 1.6 bp) showed resilience after yesterday’s impressive auction. European equities mostly show modest gains (~0.3%) but with a lackluster intraday momentum. US indices open about 0.5% higher.
On the FX market, the euro remains in the defensive (EUR/USD 1.1825). The 1.1909 resistance probably has become more solid as investors look forward to the outcome of the tapering debate at the Fed’s September 22 policy meeting. At the same time, the trade-weighted dollar also doesn’t gain traction (92.45). It was a bit under the radar this week, but in retrospect, sterling performed rather well the previous days. EUR/GBP’s rejected test of the 0.86 area evidently includes some post ECB euro weakness. Today’s July UK output/GDP data were unconvincing. Still the market ponders some mildly ‘hawkish’ comments from BoE’s Bailey earlier this week. At 0.8525, EUR/GBP has returned to the middle of the 0.8450/0.8614 ST trading range.
Czech inflation in August accelerated to a faster-than-expected 4.1% y/y (0.7% m/m), the highest in more than a decade. Prices were driven by rents, food and in segments of the economy associated with the reopening (restaurants & hotels, recreation & culture). Inflation is seen increasing even further to around 5% by the end of this year as the winter will push up prices of regulated items including energy and heating. The number far exceeds the CNB’s upper limit of the 2% +/- 1ppt target range. It is a near-done deal that the CNB will hike rates at each of the three remaining policy meetings this year. Today’s inflation figure adds more fuel to the debate whether one of the hikes should be a 50 bps one instead of a regular 25 bps. The Czech krone strengthens against the euro in a response today. EUR/CZK briefly broke below strong 25.3 support but that move failed for now.
The central bank of Russia increased policy rates again from 6.50% to 6.75%. Today’s rate hike was less than expected (50 bps) but followed the biggest one since 2014 in July (+100 bps). The Bank of Russia is trying to rein in inflation as price growth exceeds the 4% target substantially (6.7% in August). With inflation expectations still high, the balance of risks for inflation remains tilted to the upside, the bank said, suggesting more tightening to come. It may stick to a slower pace however, as Russia’s economic recovery is losing steam. Next week’s parliamentary elections are further complicating the picture. President Putin has pledged almost 700bn rubbles in new social spending, which may add to price pressure. The rubble holds steady after the policy announcement. EUR/RUB is testing important support at 86. A break lower would drastically improve the rubble’s technicals.