Markets
Powell’s ‘Big Mute’ on the future trajectory of tightening yesterday but at the same time expressing hope the Fed might be able to engineer a soft landing this morning supported a outright risk-on sentiment. The EuroStoxx 50 easily gained 1%+. The dollar was on the backfoot with EUR/USD extending gains beyond 1.11. For afternoon trading, key question was which out of two would have most market impact: A series of US data including US Q1 GDP growth (annex PCE deflator), durable goods orders and jobless claims, concretizing the Fed’s data dependent approach, or the ECB decision annex guidance (if any) at the post-meeting press conference.
As was the case for the Fed yesterday, the ECB as expected raised its policy rate by 25 bps, bringing the depo rate to 3.75%. The decision was unanimous, Lagarde said at the press conference. Contrary to the Fed, the ECB slightly amended/softened its inflation assessment in the policy statement. ‘Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner’. At the same time communiqué reads that ‘The developments since the last meeting support the expectation that inflation will drop further over the remainder of the year but will stay above target for an extended period. While some measures show signs of easing, underlying inflation remains high overall’. In this respect, interest rates will be set at a sufficiently restrictive level for as long as necessary. The appropriate level and the duration of restriction also will be determined by a data-depended approach. At the press conference, as did the Fed yesterday, Lagarde clarified that the ECB turned to a completely open and data dependent approach with respect to the future decisions (September and beyond). European yields already declined immediately after the press release of the decision and this trend was accelerated after Lagarde during the press conferences stressed the ‘complete open bias’. The ECB still repeated that the focus gradually turns to domestic drivers of inflation including wages and profit margins, but that didn’t change investors’ view. At the time of writing, the German yield curve shows a bullish steepening with yields declining between 11 bps (2-y) and 5.0 bps (30-y).
Global bond markets initially softened after the publication of the ECB decision, but US data were strong/stronger than expected across the board. US Q2 growth accelerated from 2.0% Q/Qa to 2.4% (1.8% expected) mainly due to resilient consumption (1.6% Q/Qa) and a rebound in investment (5.9%). The core PCE deflator softened slightly more than expected (3.8% from 4.9%). Headline durable goods orders also beat expectations (4.7% M/M). Shipments were more moderate. US jobless claims declined further from 228k tot 221k. All combined, today’s releases in a data-depended approach support the case for further tightening. After some softening before the data releases, US yields current trade about 3.0 bps higher across the US Treasury curve.
On other markets, equities remain well bid, with Europe this time outperforming (EuroStoxx 50 +2.25%). The US S&P 500 opens about 0.8% higher. On FX markets, interest rate divergence post the US data and the ECB decision caused a sharp reversal of initial USD softness. EUR/USD dropped from intraday top near 1.1150 to currently test the 1.10 area. USD/JPY also jumped from an intraday low of 139.38 this morning to currently trade near 140.75.News & Views
Today was another important day for the Turkish central bank to reestablish credibility among investors. Governor Hafize Gaye Erkan for the first time since her appointment last month published Turkish inflation forecasts. These projections in the past often raised eyebrows, appearing to be very unrealistic. This time around, the central bank estimates year-end price pressures to be a whopping 58%, more than double the 22.3% under her predecessor. By end 2024, inflation would still amount to 33% vs a previous estimate of 8.8%. It’s not expected to hit the 5% target over a three-year horizon either. The governor said the groundwork for the start of a sustainable disinflation in 2024 is being laid. Even if the recent policy tightening under Erkan was less than markets hoped for (900 bps to 17.5%), the new forecasts in any case suggest the central bank is far from done. For the Turkish lira, the proof of the pudding is in the eating. USD/TRY stabilizes around record highs just south of the 27 big figure.
