Markets
US and EMU bond markets took a wait-and-see attitude yesterday ahead of a series of key eco data later this week that will help shape expectations on central bank policy going forward (EMU June CPI on Wednesday, US consumer confidence & JOLTS job data today, US manufacturing ISM and ADP job report on Wednesday and US payrolls on Thursday). US yields yesterday changed less than 2 bps across the curve. German yields rose marginally (2-y +2.3 bps, 30-y +0.4 bps). Brent oil ($73/72 area) is holding near the post-war lows even as military action over the weekend underscored the fragility of the ceasefire ahead of new talks scheduled for this week. At the same time, Iran indicated that still aims to keep control over any traffic through the Strait of Hormuz (with or without the cooperation of Oman). US equity markets regained their composure, rebounding from tech-related uncertainty last week (S&P +1.17%, Nasdaq +2.07%). On FX markets, the dollar was still in some kind of consolidation mode after a strong run since mid-June (supported by Fed Chair Warsh anti-inflation commitment at the June 17 Fed meeting). EUR/USD tried to regain the 1.14 market (close 1.1422, but returning back below 1.14 this morning). USD/JPY yesterday extensively tested the key 161.95 2024 top with a break higher to a four-decade yen low this morning (162.2). Until now, Japanese authorities didn’t show up with more than verbal interventions to act against further yen erosion.
Yesterday evening after the close of the European markets, Chair Lagarde at the ECB forum in Sintra elaborated both on the reaction of the EMU economy and at the same time on the ECB reaction function in this new era. In the first place, the EMU economy showed resilience to a series of shocks over the previous years. This has reduced the need to use unconventional or forceful policy measures. The reaction of authorities to shocks often caused the outcome to be different from what it was in the past. Lagarde also assessed that these shocks have the capacity to escalate sharply, but also to swiftly unwind. This often put the CBs, including the ECB, in an intermediate zone between shocks they can look through and those they must react to forcefully. In this context, Lagarde also elaborated on the values of scenario analysis as core part of the decision making process with the bank having moved from ‘forward guidance’ to ‘framework guidance’. As the market apparently understood the reaction function of the ECB quite well as the energy shock this year developed, it allowed the bank to take some more time to take robust decisions. This has created the space for monetary policy to go back to the basics: stabilising inflation with policy rates as a primary tool, acting in a measured way, and taking decisions meeting by meeting. Maybe in some way, there is also some kind of link/resemblance with Fed Chair Warsh pointing to the market reaction/value of market pricing as an important input for CB policy. Market current still prices one additional ECB rate hike by e.o.y.
News & Views
Shop price inflation in the UK was 1.2% y/y in June, the same as in May, the UK’s British Retail Consortium said today. Food inflation decelerated from 2.7% to 2.4%, which BRC’s chief executive Dickinson said was thanks to bumper crops and strong competition. Non-food prices rose 0.6%, slightly up from the 0.5% last month. Promotions across summer essentials in clothing have helped to keep a lid on this category. Dickinson warned that while a competitive market is keeping overall inflation in check right now, retailers are facing “mounting cost pressures, including higher National Insurance, the triple packaging tax and higher input costs from extreme weather and geopolitical tensions”.
The US Supreme Court yesterday in a majority decision limited the president’s power to remove Fed governors when doing so for “good reason”. After being accused of mortgage fraud, president Trump sought to fire Fed governor Cook on the basis of “good reason”. The Supreme Court considered this wasn’t the case, allowing Cook to stay on board while the case is being resolved. However, the Court handed the president an important victory in a second ruling, which states that federal agencies that wield executive power must be ultimately answerable to the president. That means Rebecca Slaughter, the Democratic official at the Federal Trade Commission who was fired by Trump last year and at the center of the Supreme Court case, remains permanently dismissed. In a broader perspective, the ruling cleared the way for POTUS to fire, without cause, officials from many other similar agencies, including key ones such as the Securities and Exchange Commission.
. US yields yesterday changed less than 2 bps across the curve.){kind=link}