An interview by ECB Schnabel grabs most headlines today. She told Reuters that concerns about the inflation outlook, which triggered a 50 bps rate hike in July, have not been alleviated. The move wasn’t enough to alter the outlook and even a recession on its own would not be enough to tame inflation pressures. Inflationary pressures won’t vanish quickly and tackling the risk of inflation expectations becoming de-anchored primes downside growth/recession risks. Schnabel’s comments are a very strong nod towards a new 50 bps rate hike at the September 8 policy meeting. Such move is discounted in money markets, but we think that markets are too dovish further down the line. They discount a deposit rate of around 1% by year-end, suggesting the ECB will slowdown its tightening to 25 bps moves in October and December. Our preferred scenario includes more 50 bps moves. The hawkish Schnabel comments come on the heels of this week’s core bond sell-off and didn’t trigger that much of reaction. German Bunds do underperform US Treasuries. German yield rise slightly across the curve whereas US yields lose 2 bps (30-yr) to 5 bps (2-yr).
US eco data can’t explain the difference. US jobless claims declined slightly, from 262k to 250k while the July Philly Fed business outlook parted ways with a horrible Empire manufacturing survey earlier this week. The Philly Fed gauge unexpectedly improved from -12.3 to 6.2. Details showed an increase in new orders and shipments as well as number of employees. Prices paid fell to the lowest level since December 2020 in the only similarity with NY survey. This likely reflects a decline in energy costs. The six-month forward outlook remains depressed compared with the current situation. FX markets remain stoic. EUR/USD still trades in the 1.01-1.02 area with EUR/GBP flipping sides around 0.8450.News Headlines: The Norwegian central bank raised its key policy rate as expected by 50 bps, from 1.25% to 1.75%. It’s the second consecutive move from this size since the Norges Bank switched strategies back in June: from gradualism to frontloading. And that’s exactly what the central bank will continue to do. Governor Wolden Bache indicates that the policy rate will most likely be raised further in September based on the current assessment of the outlook and the balance of risks. Economic activity is high with little spare capacity. Inflation has been considerably higher (CPI-ATE 4.5% Y/Y in July) and more broad-based than projected in June with a risk that it remains higher for longer and becomes entrenched in inflation expectations. A markedly higher policy rate is needed to ease pressures in the Norwegian economy and to bring inflation down to target even as there is a risk of sharper slowdown in (global) growth and a cooling down of the housing market. This suggests a faster rise in the policy rate so that the central bank doesn’t need to tighten policy even sharper later on. Norwegian money markets discount a policy cycle peak of 3.75% early next year. The Norwegian krone gained some ground after the decision with EUR/NOK sliding from 9.90 towards 9.83. The NOK swap curve turns even more inverse today with front-end yields rising around 5 bps. The Turkish central bank cut its policy rate unexpectedly from 14% to 13% in a context of 80% Y/Y inflation (24-yr high) and an extremely weak currency. Turkish president Erdogan is an outspoken follower of his own unorthodox theory that monetary policy easing tackles inflation. He finally found a TCMB-governor willing to walk the talk. The official statement nevertheless points to the economic side of story. Leading indicators for the third quarter point to some loss of momentum in economic activity. The MPC deems it important that financial conditions remain supportive to preserve growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk. Therefore, it cut the policy rate by 100 bps, but judges this one-off cut as appropriate given the outlook. The Turkish lira pays the price with EUR/TRY approaching the YTD high at 18.50.