Recent underperformance of EMU bond/interest rate markets versus the US continues. European investors kept a close eye at comments and speeches at the ECB forum in Sintra. Before and at the June 9 policy meeting, the ECB already provided quite a detailed roadmap signalling a 25 bps rate lift-off in July and (several) >25 bps steps later this year if inflation doesn’t substantially improve by then. If the consensus on Friday’s CPI release (0.7% M/M, 8.5% Y/Y) comes true, this improvement won’t materialize anytime soon. In this respect, ECB’s Lagarde reiterated the benefits of gradualism, but at the same time highlighted ‘the option to act decisively on any deterioration in medium-term inflation, especially if there are signs of a de-anchoring of inflation expectations’. Latvian ECB member Kazaks even defended the merits of frontloading a bigger rate hike already at the July meeting, but there are few signs that his view has a majority within the MPC. President Lagarde and other governors also elaborated on steps to avoid fragmentation of policy across countries. This now even is considered a necessary condition to be able to raise rates enough to address elevated inflation. A first line of defense with flexible reinvestments of proceeds from maturing bonds of the PEPP portfolio, will start as soon as July 1. On the new tool that is in the making to handle unwarranted spread widening, the ECB president said:’ The new instrument will have to be effective, while being proportionate and containing sufficient safeguards to preserve the impetus of Member States towards a sound fiscal policy’. So, some, albeit soft, conditionality will apparently be included. Some ECB members also aired the idea to sterilize the liquidity created via the new tool. The news from Sintra shouldn’t come as a big surprise for markets. Still, the idea that the new ECB toolkit makes it easier to raise rates without market fragmentation might fuel expectations for more bold ECB action if the inflation outlook worsens further. German yields are rising between 5.5 bps (2-y) and 8.5 bps (10-y). The sharp rise in the 5-y yield (+14 bps) is partially due to a benchmark change. The bottoming in EMU yields after last week’s correction clearly is taking shape. The narrowing of intra-EMU spreads versus Germany also continues (10-y Greece -7 bps, Italy -4 bps). Moves in the US bond market were again much more modest with the 2-y yield little changed while yields for longer maturities rose about 2 bps. European equites are extending a cautious rebound (Eurostoxx + 0.75%/1.0%), but the LT picture remains fragile. US equities show similar gains after the open. Oil also gains further ground (brent $ 117/b).
On FX markets, the forint rebounded to EUR/HUF 398.75 after the MNB unexpectedly raised the its policy bas rate by 185 bps to 7.75%. It will bring the 1 week deposit rate to the same level at its next week weekly tender. EUR/USD tried to regain the 1.06 handle this morning. However, additional interest rate support failed to trigger a break higher. Profit taking even brings EUR/USD back to the 1.0540 area. EUR/GBP also trades off the intraday peak levels, but is little changed in a daily perspective (0.862). USD/JPY (136.15) again near the multi-year top.
Polish Monetary Policy Council member Kotecki argued in favour of a rate hike of at least 100 bps at its July 7 policy meeting as he expects another sharp rise in inflation in early 2023 due to higher electricity and gas prices. Kotecki in amongst the more hawkish members on the board with governor Glapinski earlier hinting that the tightening cycle might be drawing to an end. Polish inflation numbers are on due on Friday and expected to rise by 1.5% M/M and 15.5% Y/Y. The National Bank of Poland this year applied monthly 75 bps rate hikes from March with even an 100 bps rate move in April. The base rate currently stands at 6%. Accelerating inflation and more drastic June action by the CNB (+125 bps to 6%) and MNB today (+185 bp to 7.75%) suggest that risks are clearly tilted to more aggressive action. Polish money markets discount a policy rate in excess of 8% by the end of the year and peaking at 8.5% by mid next year. The Polish zloty could use the additional support. At EUR/PLN 4.7, it remains in the danger zone of slipping back to weakest levels on record. The NBP holds a view that a strong(er) currency should be part of the equation in the current market setting (high inflation & aggressive tightening cycle)...