Markets
Another series of ECB speeches made it all but certain now: a July rate hike is coming. This was not only confirmed by usual suspects including German ECB governor Nagel. The middle/neutral camp in the ECB is also favouring the idea. Executive board member Elderson said they can “start weighing policy rate normalization in July” while French governor Villeroy expects to raise rates gradually from the summer on. Even president Lagarde caved, saying a rate hike may follow “weeks” after the end of bond buying. The July 21 meeting thus ticks all the boxes. The comments had little impact though. Markets were extremely focused on the US CPI release, and rightly so. Both headline and core inflation eased in April from their historic highs to 8.3% and 6.2% respectively. However, more easing was expected (8.1% and 6% respectively). Month-on-month, headline inflation slowed significantly to 0.3% from a commodity-driven 1.2% in March. But the core measure doubled in speed, from 0.3% to 0.6% m/m whereas only 0.4% was expected. Shelter (0.5% m/m) continues to be a major source of price pressures, along with new vehicles (1.1% m/m) and food (0.9% m/m). (General) services inflation printed at a hot 0.8%. The steep drop in inflation expectations over the past few days suggested markets were perhaps getting a bit too comfortable with the idea of prices pressures easing soon and quickly. Today’s outcome was a reminder to both US and European investors: it won’t. US bond yields immediately shot up, erasing intraday losses. Stakes for, and pressure on the Fed remain very high, resulting in a textbook bear flattener. Changes went as high to 10 bps before trimming gains as the CPI dust settled. Yields currently add 1.3 bps (30y) to 6 bps (2y). German yields rise in lockstep, adding up to 4 bps (30y). EUR/USD dipped in a kneejerk reaction to an intraday low of 1.05. But in a sign of building fatigue, the dollar rally didn’t last. The currency pair is currently back at or even higher than levels from before the release at 1.056. The trade-weighted DXY is circling around recent cycle highs at 103.68. The British pound holds steady against the euro (EUR/GBP 0.854) and the USD (GBP/USD 1.235) even with Brexit tensions resurfacing. A rebound in prices of the likes of oil (Brent +3.6%) boosts commodity currencies (AUD, NZD, NOK) today. In Central-Europe, the Czech koruna underperforms peers during CNB’s Michl’s first speech after being appointed as new head of the central bank (see below).
News Headlines
Czech president Milos Zeman officially appointed Ales Michl as the next governor to the lead the Czech National Bank. He’ll succeed Jiri Rusnok in July. Michl was already known as an ultra-dove as he opposed the aggressive rate hike cycle that brought the policy rate to 5.75% currently. Michl wants to bring inflation back to 2.0% from an expected peak of 15% in summer. He expects this process can take two years. However, as he sees current inflation as mainly due to external factors/energy prices he doesn’t consider higher rates as a solution. He will propose interest rate stability at the first meeting he will lead in summer (August 4). However, the CNB still has one meeting left at June 22 where it will decide on further rate hikes in its current composition. Zeman also still has to decide on the reappointment of two other board members who voted in favour rate hikes (Benda, Nidetzky). The Czech two year swap yield declined more than 20 bps today to 6.12%. The koruna resumed the downmove that started after first rumours on Michl’s appointment were aired last week. EUR/CZK jumps from the 25 area to 25.3.
The pace of monthly prices rises in Brazil eased in April from 1.62% M/M to 1.06.% M/M. However, this still resulted in headline inflation printing at 12.13%Y/Y, the fastest pace since 1996! Eight out of nine components rose on a monthly basis with food and beverages, transportation and health and personal care showing the biggest gains. Only housing related prices eased. The Central Bank of Brazil last week raised the policy rate further by 1.0% to 12.75%. In the minutes of the meeting the CB indicated that it already did quite some work to stem inflation (cycle started at 2.0%). However, a further rate hike of a lower magnitude probably is still needed at the June meeting. The Brazilian real, which had a good run earlier this year, today slightly eased further trading at USD/BRL 5.1475.
