Markets
Here we go again. It has been a reliable roadmap over the past few months: the inflation scare dominates in the run-up to actual price data releases and central bank meetings at which policymakers sound more hawkish each time. When both events took place, markets start pondering what an aggressive tightening cycle will mean for growth. Recession concerns then take over and result in some sharp moves similar to the ones we’re seeing today. Core bond yields tumble with Bunds outperforming Treasuries. German yields shed 11.7 bps (2y) to 16.1 bps (10y) in a flattening move. The US curve bull steepens with changes ranging from -13 bps (2y, 3y) to -9 bps (30y). Nowhere in the advanced economies is growth this much of a concern than it is for the UK. Momentum already fell considerably on the British island according to recent data. On risk-off days like these, Gilts tend to outperform peers for this reason. UK yields drop a mammoth 20 bps at the front-end (2y, 5y) as markets contemplate the aggressive BoE tightening approach currently discounted (3 x 50 bps, 1 x 25 bps for the remainder of the year). This is taking place even as UK price data this morning showed headline inflation accelerating to 9.1% y/y. Core inflation eased a tad to 5.9% but remains at historically high levels. Producer price inflation isn’t showing any signs of abating soon. Yields further down the curve lose 16/17 bps too (30y/10y). Commodity markets were under strain as well today. Brent oil slips more than 6% to $107.5 per barrel. Stocks already erase part of (US) or more then (Europe) yesterday’s gains. The EuroStoxx50 (-1.85%) is flirting with the previous YtD closing low. Wall Street opens with losses of <1%.
The Japanese yen takes the lead on currency markets. USD/JPY (135.81, down from 136.57) forfeits some of yesterday’s gains that brought it to a 24-year high. The Swiss franc comes in second. EUR/CHF eases to 1.015. The euro and dollar are more or less on par with the former even having a small advantage over the greenback. EUR/USD left behind an intraday low at 1.047 to trade in the 1.055 area – slightly up from 1.053. EUR/GBP continues to flirt with the 0.86 area within a tight trading range. That’s actually not that bad from sterling’s point of view given the significant Gilt outperformance. The Czech koruna eases towards EUR/CZK 24.74 following the Czech National Bank decision to raise rates by no less than 125 bps to 7%. The supersized move was at least partially expected and it may well mark the end of the tightening cycle. The next time the CNB meets it will be I na very different, more dovish, composition. The CZK downleg has a smell of being capped by FX interventions though. News HeadlinesInflation in South Africa in May jumped more than expected. Headline inflation was reported at 0.7% M/M and 6.5% y/y (was 5.9% in April). Core CPI (ex. food, non-alcoholic beverages, fuel and energy) also rose further to 4.1% Y/Y from 3.9% Y/Y in April. The headline figure was the highest since January 2017. The SARB targets inflation to stay between 3.0% and 6.0%. The SARB since the start of the hiking cycle in November last year raised the policy rate 3 times by 0.25% but stepped up the pace with a 50 bps hike last month. Higher inflation in South Africa, central bankers in core major economies raising rates faster than expected and a weakening of the rand raises speculation that the SARB also might have to consider 75 bps hikes later this year. USD/ZAR trades stable just below 16.According to the monthly consumer survey of the National Bank of Belgium, consumer confidence in June rose for the third consecutive month to -11 from -13. Even so, the confidence indicator is still below its long-term average. The indicator only reversed one third of the sharp drop in May over the previous three months. Consumers became more positive on their assessment of the economic situation in Belgium (-31 from -35) and are positive about their savings (7 from 4). The assessment on their financial situation only improved marginally (-8 from -9). Consumers downwardly revised their assessment on the job market (unemployment indicator from 10 to 12).
