Markets
Moves on core bond markets are once again impressive today. Recession fears are holding a tight grip. Investors are pricing out central bank rate tightening, especially for the euro zone. This is happening even as (or is it because?) French and Portuguese inflation, just as was the case in Belgium and Spain yesterday, accelerated further. Prices in the former country rose by 6.5% y/y in June, up from 5.8% in May. Portuguese inflation came in at 9% vs 8.1% the month before. The numbers confirm the cooldown in Germany is a (statistical) fluke. The outdated US PCE deflator stabilized at 6.3% in May with the core reading slowing to 4.7% from 4.9%. Both were slightly below expectations but left no material market trace. Still, German bond yields tank 10 to 18 bps in a bull steepener. Markets currently price the peak in the ECB policy rate back below 2%. US Treasuries underperform with yields 6.7-8.1 down at the front end (2y-5y) and 4.6-6 bps further out (30y-10y). UK Gilts yields forfeit up to 11 bps (2y). Other markets fit the recession narrative as well with European stocks tumbling another 2.5%+. The EuroStoxx50 is testing the June lows around 3430 and just a whisker away of the March 2022 post-invasion trough of 3387. Wall Street opens with losses of about 1.5%. Commodity prices are also under pressure. Copper loses 2.5%, iron ore is down for the day. Brent oil loses marginally ($115.85/barrel) after OPEC+ ratified the planned August oil supply hike of 648k barrels/day at its meeting today. With the move, it restored the final step of the 9.7mln barrels a day production cut after the pandemic broke out two years ago. The oil cartel didn’t elaborate on what its next move will be. Gas prices are the exception to the commodity rule. The Dutch future jumps to the highest level since early March amid intensifying worries over shortages.
Euro bulls are sounding the alarm on FX markets. The common currency is under continuous selling pressure this week, sliding from EUR/USD 1.06 at the start to heavily test the 1.04 big figure today. Crucial support kicks in at 1.0354 (May multiyear low) and/or 1.0341 (2017 low). It serves as the last line of defense before parity. The Japanese yen gains slightly vs the dollar (USD/JPY down to 136.13) but more vs the euro (EUR/JPY down to 141.65). The Swiss franc edges higher. EUR/CHF nudges below the March intraday low of 0.997. Heavy Bund outperformance relative to UK Gilts (yields up to 10 bps lower) is even allowing sterling to take the upper hand over the euro. EUR/GBP (0.857) is at risk losing the upward sloping trend channel even as the economic future eyes at least as dark in the UK. News Headlines
The Swedish Riksbank (RB) joined the broader trend of CB’s frontloading policy normalization, raising the policy rate by 50bps to 0.75%. CPIF, the RB’s preferred inflation measure, rose 1.0% M/M and to 7.2% Y/Y in May. Core inflation (ex energy) printed at 5.4% Y/Y. The Riksbank upwardly revised its 2022 average CPIF inflation forecast to 6.9% (from 5.5%). Prices rises are still seen at 4.2% next year but expected to return to 2.0% in 2024. It expects the policy rate to be close to 2% at the start of next year. This implies two rate hikes of at least 50 bps at the regular meetings in September and November. Governor Ingves didn’t exclude a 75 bps hike if necessary but dismissed the idea of additional rate moves in between regular meetings. The Riksbank will also shrink its asset holdings faster an expected, reducing reinvestments in H2 of this year to SEK 18.5 bln instead of SEK 37 bln as planned in April. The Swedish krone doesn’t profit, on the contrary. The RB believes that a policy rate peak near 2% will be enough to bring inflation back to 2% but markets apparently don’t. The krone weakened further to EUR/SEK 10.735.
According to Bloomberg reporting, German energy companies are asking the government to be allowed to pass on higher gas prices to their customers. Due to lower gas deliveries from Russia, the companies are coming under financial stress as they have to replace missing reserves at an extra cost. In this respect, Germany’s biggest buyer of Russian gas is reported to be in talks with the German government on a bail-out or other forms of government support.
