Markets
Yesterday’s ECB meeting will go down in history books as one of the most important ones. The central bank committed to kill off surging inflation by ending asset purchases and hiking rates from July on. First by 25 bps, then double that in September and possibly October. European yields went crazy and rose across the curve, the short end underperforming. That part of the curve still went strong today. The long end however eases several bps, in a potential sign of markets fearing the impact of aggressive ECB normalization on the economy going forward. Yet, the central bank has no choice. And neither has the Fed.
We move from the ECB yesterday to US CPI today. Inflation unexpectedly shot up from 8.3% to 8.6% in May, thanks to very strong monthly dynamics (1% m/m). So much for the “we’ve moved past the peak”. Price pressures were once again broad-based, ranging from food (1.2% m/m), over housing (0.8%) and transportation (2%) to airline fares (12.6%). As a result, core inflation eased less-than-hoped, from 6.2% to 6% (0.6% m/m, unchanged from April). Wage gains coming from a tight labour market are simply too little with these kind of numbers. Separate data showed that inflation-adjusted hourly earnings in May fell 3% y/y, the 14th (!) straight decline. The data all but cement market expectations for a third 50 bps rate hike in September with a 85% chance priced in for another such move in November.
American yields soar between 3 bps (30y) to 14 bps in the 2y. The latter easily surpasses the previous intraday cycle high of 2.85% to trade at 2.95%. The 5y set a new cycle high as well. The 10y (3.11%) is attacking the 3.12% closing high from early May. European/German yields jump another 8.2-11 bps (5y-2y). About half of that was due to further repositioning post-ECB with the remainder taking place on the back of surprisingly high US CPI serving as proof that inflation won’t go down without a proper fight.
All of this central bank anticipation/speculation is demanding a heavy toll on equities. European stocks tank almost 3%. The EuroStoxx50 is testing support at 3630. A break paves the way to the May low of 3526. Wall Street tumbles between 1.7-1.9%. The S&P 500 gaps below the March 2021 top and already attacks the February interim highs.
It’s classic risk-off on currency markets. The dollar advances against all but one … the Japanese yen. USD/JPY eases slightly but remains near the 22-year high of 134.56. That’s surprising given the strong core bond yield increases. On a trade-weighted basis, DXY is testing the 104 barrier – the final hurdle before a return to the 105 cycle high. EUR/USD sinks below 1.06 to 1.0537, turning the technical picture increasingly complicated, if not disastrous.News HeadlinesInflation in Norway rose a more-than-expected 0.2% M/M resulting in a 5.7% Y/Y print. Underlying inflation at 0.4% M/M and 3.4% Y/Y also surpassed expectations. The Norges Bank (NB) since September last year followed a gradual path of quarterly rate hikes. In its May policy statement the NB said that ’If there are prospects of persistently high inflation, the policy rate may be raised more quickly than indicated by the policy rate forecast in the March Report’. The NB could consider a bigger 50 bps hike at the June 23 meeting or an additional 25 bps step at the August meeting. The Norwegian krone gained modestly today with EUR/NOK falling to 10.15 from the 10.18 area before the start of trading this morning. Similar story for inflation in neighboring Demark. The domestic measure of inflation rose 0.9 M/M to be up 7.4%Y/Y (from 6.7% in April). EU harmonized CPI even jumped from 7.4% to 8.2%. Inflation in the Czech Republic also jumped 1.8% M/M bringing the Y/Y measure to 16.0% Y/Y (was 14.2% in April). Prices rises on a monthly basis were mainly driven by food and non-alcoholic beverages (3.4% M/M), housing water energy and fuel (1.5% M/M) and hotels and restaurants (3.0%). The jump in inflation is fueling speculation that the MPC of the Czech national Bank at the last meeting in its current composition might go for an final ‘outsized’ hike (100/125 bps). From July, the MPC with new governor Michl, who opposes the aggressive approach, and three other new members then might keep rates unchanged for a longer period. The Czech koruna today traded little changed in the EUR/CZK 24.70 area as markets take into account the presumed change in the policy approach beyond June.
