Markets
The ECB-forum in Sintra shifted in higher gear with more speakers hitting the wires today. Kazaks from Latvia kicked off in early European dealings saying the risks of doing too little are still bigger than doing too much. More hikes are necessary and he added that should the central bank pause at some meeting, it doesn’t mean a stop to the tightening cycle altogether. He also called markets plain wrong in predicting rate cuts in 2024H1. His Baltic colleague Simkus struck a similar tone while ECB President Lagarde reaffirmed the central bank’s base case for another hike in July. She also noted it is unlikely that the ECB can soon say the rate peak has been reached and that the ECB must avoid expectations of a too-rapid policy reversal. Next we have Belgium’s Wunsch offering concrete guidance whether or not to expect a pause in September. For that to happen, core CPI must fall in all three occasions between now and that meeting. If analysts are right on this Friday’s June outcome (expectations for core CPI to rise to 5.5% from 5.3%), we’re looking at an ECB depo rate of 4.25% minimum. German Bunds trade rather stoic today. We do note a slight underperformance of the front, adding 1.4 bps vs longer maturities down 1.5-3.3 bps. In other ECB news, the central bank has allotted more than €18.5bn in its weekly MRO. Not a huge amount compared to the excess liquidity still sloshing around in markets but still the biggest uptake since 2017. The surge precedes a big TLTRO repayment (>€500bn) by financial institutions later this week. US Treasuries also trade without a clear direction. They temporarily neared the intraday lows again after stronger-than-expected durable goods orders, including the core shipment gauges. Two separate indicators tracking US housing prices also came in higher than anticipated, underscoring the ongoing bottoming out in the market. US yields (ex 2-y, benchmark change) currently shed 1.4-2.1 bps across the curve. The EuroStoxx50 on equity markets pared opening gains to trade flat. Wall Street opens in the green with the Nasdaq outperforming. The euro is having the upper hand on currency markets today. EUR/USD rebounds from 1.0906 to 1.0969 currently. It is being helped by an overall lackluster USD performance. The Japanese yen hits a new 15-y low against the euro at EUR/JPY 157.38 with hawkish ECB talk marking an ever bigger contrast with BoJ policy. EUR/GBP extends its recent bottoming out process. The pair is trying to recoup the 0.86 big figure.
News & Views
After an unexpected and broad-based decline in the June overall business Climate index yesterday, the German IFO institute today also reported a drop its exports expectations measure. Sentiment in the German export industry deteriorated notably this month expectations index falling from +1.0 in May to minus 5.6 points in June, marking the lowest level since November 2022. “In addition to weak demand on the German domestic market, we’re now also seeing fewer orders from abroad,” Klaus Wohlrabe, Head of Surveys at Ifo was quoted in the press release. The majority of industries expect exports to decline in coming months with only clothing manufacturers and the beverage industry expecting significant growth. Following months of growth, food companies now expect a drop in international sales. The outlook for the metal industry also worsened considerably as is the case for the furniture industry, which is suffering in part from the weak construction sector.
Canadian May inflation figures printed at consensus. Headline inflation rose by 0.4% M/M (from 0.7% in April) with the Y/Y figure slowing from 4.4% to 3.4%, the smallest increase since June 2021. The slowdown was largely driven by lower year-over-year prices for gasoline (-18.3%) resulting from a base effect. Excluding gasoline, prices rose 4.4% in May following a 4.9% increase in April. Service inflation slowed to 4.6% from 4.8%. The largest contributors to the month-over-month increase were mortgage interest costs and travel services, which includes traveler accommodation and travel tours. A 3-month moving average of some key inflation metrics flagged by the BoC slowed from around 3.8% to 3.7%. Canadian money markets are split 50/50 over whether the central bank will conduct a second-consecutive rate hike at its July 12 policy meeting after a two meeting-pause earlier this year. The loonie showed some volatility on the releases but holds near pre-CPI levels of 1.3155.
