Markets
Yesterday’s solid US ISM and hawkish Fed minutes provided the trigger for interest rate markets to rebalance away from risks to growth to central banks continuing to prioritize inflation at the upcoming meetings. Technical support levels in the US (2.70%) and German 10-y (1.15%/1.18%) yields also did their job. European interest rates still had some catching up to do after late yesterday’s jump in US yields. The account of the ECB June policy meeting also kept the focus on inflation, even as the language was less aggressive compared to the Fed. The ECB prefers to start with a 25 bps point rate hike to prevent an excessive market reaction. At the same time, the ECB signaled that gradualism shouldn’t mean small, slow steps. The German curve bear steepens with yields rising between 11 bps (2-y) and 4 bps (30-y). Intra-EMU spreads also widening. Recent spread narrowing was inspired both by lower core yields and by the ECB announcing a forceful mechanism to prevent market fragmentation. On the use of the instrument, ECB’s Villeroy suggested that if the tool was big enough to illustrate the ECB’s limitless commitment, maybe it actually may not need to be used. At least today, the 10-y Italian vs Germany widens 4 bps. Greece even adds 19 bps. US yields trade little changed maintaining yesterday’s rise. US jobless claims (235k) and the trade balance (deficit $85.5 bln from $86.7 bln) were close to expectations. Challenger US job cuts rose further from very low levels. The report suggests a gradual cooling in the job markets as some employers start to cut costs. A broader picture will be provided by tomorrow’s payrolls report. For now, the rebound in yields doesn’t hurt risk assets. European equities are rising 2.0% (Eurostoxx50). US indices open with gains of about 0.75%/1.0%. In the commodity complex, oil (Brent $101.4 p/b) and copper also are looking for a bottom after recent setback.
FX markets finally also enter calmer waters. The DXY (107) index stabilizes near the highest level in almost 20-y. USD/JPY hovers near the 136 big figure. Even so, the overall relative calm on other markets still doesn’t help euro. EUR/USD is holding losses well below the 1.02 barrier (currently 1.017). This doesn’t bode well for the single currency if sentiment would again deteriorate for one reason or another. Sterling recently didn’t react much to the political turmoil. However, the UK currency today made some further headway as UK PM Johnson finally resigned as Prime Minister. EUR/GBP moves further away from the broken uptrend line trading near 0.85.
News Headlines
People close to the German government reported a silent agreement among Chancellor Scholz’ cabinet members that they can’t stick to fiscal plans in case Russia ends gas flows for longer. German FM Lindner earlier indicated that EMU countries should scale back public debt from 2023 to avoid fiscal spending from fueling inflation further. In practice, Germany would again postpone a reintroduction of its debt brake. Scholz on Monday already suggested that more aid measures would be needed to tackle the brewing energy crisis. Later he accused Russian President Putin of using energy as a weapon.
Hungarian Cabinet Minister Gulyas said that the country decided to accept EC demands to secure EU funding. The two were at odds following breaches of the rule of law. The EU delayed the disbursement of €37bn, consisting both of subsidies in the multi-annual budget framework and pandemic-aid programs. Bloomberg reports that compromises include allowing courts to overrule the chief prosecutor on whether to initiate graft investigations; reducing the number of single bids for both EU and national tenders; narrowing the number of rapid legislative changes; and using part of the EU funding to diversify energy resources, now largely reliant on Russia. The timing of the Hungarian U-turn is interesting. The forint is in free-fall in current volatile market and couldn’t even profit from a jumbo 1-week deposit rate hike by the central bank earlier today (9.75% from 7.75%; EUR/HUF 4.15). Ending the dispute with EU pulled EUR/HUF back towards 406 at the time of writing.
