It has been quite the roller coaster ride the past week. Sometimes it takes months to get to the same number of huge, surprising, market-moving events. From the ECB’s firm commitment to hike policy rates by 25 bps in July and likely accelerate to 50 bps from September, over the renewed US inflation acceleration which prompted a last-minute 75 bps Fed rate hike to the Swiss National Bank’s 50 bps rate hike shocker which leaves ECB policy rate as the lowest in town. Not to mention the Bank of England’s fifth consecutive 25 bps rate hike which will likely morph into a 50 bps rate hike path from August onwards or the Hungarian National Bank’s silent retreat in letting the base rate prime again over the 1-week depo rate (lifted by 50 bps yesterday to defend the forint around EUR/HUF 400). The icing on the cake would have been a U-turn by the Bank of Japan this morning, but governor Kuroda and his colleagues remain the sole defenders of an ultra-easy monetary policy setting for now. Even Japanese inflation is on the rise though, proving that Kuroda’s Peter Pan approach to central banking is working: “the moment you doubt whether you can fly, you cease forever to be able to do it”. The BoJ’s verbal interventions against JPY, together with the Ministry of Finance, only work against them. USD/JPY is on course to revisit the cycle high at 135. Put your money where your mouth is.
This week’s core bond sell-off smells like a short term exhaustion move with markets now discounting aggressive tightening cycles. Especially in the US, but also in Europe. We argue in favour of a consolidation period with next inflation numbers at least a fortnight away and central bank meetings out of the way. Economic activity can in the mean time bring the growth/inflation dilemma back to the fore. In such context, we think that stock markets will have a tough time to recover some of this week’s heavy losses. Medium term, we hold our view that both core bonds and stocks are in a sell-on-upticks pattern. It could take the sting out of the peripheral spread widening as well together with the ECB’s promise to come up with some back-up bond buying programme to avoid an unwarranted market fragmentation amongst EMU sovereigns. The dollar set a new multiyear high on a trade-weighted basis, north of 105, but couldn’t hold onto gains. If our consolidation scenario turns out right, we could be up for some sideways dollar trading as well. For DXY, we’re looking at a range between roughly 101.50 and 105.50. For EUR/USD – which didn’t set a new recovery low by the way – that’s 1.0350 to 1.08. EUR/GBP yesterday attempted to escape the upward trend channel in place since mid-April, but failed. We hold our sterling-negative bias longer term.
Polish CPI excluding food and energy prices rose 1.0% M/M to be up 8.5% Y/Y. This compares to 1.7% M/M and 7.7% Y/Y in April. The figure was close to expectations. The series excluding the most volatile prices (1.3% M/M and 10.4% Y/Y) and the measures excluding administered prices (1.9% M/M and 14.0% Y/Y) still printed substantially higher. Earlier this month, the Polish Statistical office already reported the headline inflation at 1.7% and 13.9%. The NBP has an inflation target of 2.5% with a tolerance band of +/- 1.0%. After the June 8 policy meeting, NBP governor Glapinski suggested that the NBP might be coming closer to the end of the rate hike cycle. However, other MPC members indicated that it is probably too early. Money market rates still see room for the Polish policy rate to be raised toward the 8% area (from 6% currently). The zloty regained modest ground today (EUR/PLN 4.70).
The European Commission today recommended that Ukraine and Moldova can become candidate to join the EU. The move still is only a first step in a long procedure that will take years as the countries will have to work to comply with a long list of EU regulation. To formally become a candidate, both countries also need unanimous approval from all the member countries at next week’s EU summit. With respect to the candidacy of Georgia, the Commission said that the country still should make further reforms to be ready to receive the same status.