When the ECB starts responding using official statements on financial media news articles, then you know something is going on. It does not happen often and the language used was pretty direct. Let’s circle back for a moment. The Financial Times this morning reported that ECB chief economist Lane during a private meeting with economists said the central bank expects to hit the 2% inflation target soon after the policy horizon (ending in 2023). “Didn’t happen”, the ECB replied in a first reaction. Later, ECB governor de Cos (Spain) and Makhlouf (Ireland) sought to further downplay market speculation by saying that “current conditions don’t allow for a rate hike in 2023”, the FT’s conclusion is “incompatible with ECB guidance” and “fears of excessive inflation are overstated”. Their comments were widely ignored however. Kazaks’ comments, although not the most closely watched ECB governor, caught market’s attention instead. He said that the inflation outlook is likely to be revised higher in December. He sounded cautious on price developments otherwise (eg. he doesn’t see the 2% reached in the medium term), but that didn’t matter to markets. With the inflation genie out of the bottle, European stocks fell abruptly from intraday highs into the red. It doesn’t necessarily mean markets expect rate hikes soon but the inflation talk does add to the idea ultra-easy monetary policy (via PEPP) may be scaled back a little faster than initially thought/suggested by the ECB last week. European stocks bottomed in the meantime and even trade marginally back in the green in early US dealings. WS opens with minor losses, showing more signs that the buy-on-dips pattern is losing momentum. The German yield curve sticks to its bear steepening trend nonetheless. Yields advance 0.9 bps (2y) to 3.1 bps (30y). It’s 10y variant marches on in the upward trend channel, taking out resistance around -0.287%. US yields were flat for most of the day before suddenly jumping as the US started joining. The curve currently shifts north with 2-3 bps increases in tenors from 5-30y with the 10y attacking 1.37% resistance. As a result, EUR/USD lost it’s intraday interest rate differential and has to forfeit earlier gains. The currency pair retreated from today’s high around 1.179 to 1.176 (unch.) at the time of writing. Support lies at 1.1752. USD/JPY tries to cap 110. The yen is under pressure overall due to higher core yields. Disappointing UK August retail sales don’t break sterling’s spirits. After a minor kneejerk uptick this morning, EUR/GBP is trading flat near 0.853. Cable is changing hands in the high 1.378 area. Next week will be important for the USD and GBP with both the Fed and Bank of England having a policy meeting.
Russian Central Bank governor Elvira Nabiullina indicated that the Central Bank still might raise its policy rate further at the upcoming meetings. The Bank last week raised the policy rate from 6.50% to 6.75%, slightly less than some in the market had expected. However, Bank took a bold step by raising the policy rate by 1% in July. Governor Nabiullina indicated that the key rate could only return to its neutral level of 5%-6% once the central bank is confident of a stable slowdown in inflation. Inflation in Russia still printed at 6.7% in August (core 7.1%). Even as the central Bank maintains a tightening bias the central bank governor in another interview indicated that inflation is currently near its peak levels and might start easing in in October. The rubble recently remained well bid with EUR/RUB breaking below the EUR/RUB 85.75 support/previous 2021 low. The pair currently trades near 85.42.
According to a statement from the Spanish Labour Ministry, the Spanish government has agreed to raise the minimum wage for the second time in less than two years. The minimum wage will be raised by €15 per month, which is about 1.6%. The increase is applicable from 1 September. The government intends to raise the minimum wage further. Contrary to the previous increase, the current decision was not backed by industry groups. Economy Minister Calvino resisted earlier calls for such a move. However, the economic recovery, higher inflation and rising employment now created an environment to allow for higher minimum wages.