Markets
The ECB’s annual symposium in Sintra provides plenty of comments and views on the economy and monetary policy. ECB president Lagarde went a long way in her opening remarks explaining the difference between forward guidance and framework guidance. Lagarde believes that markets well understand the ECB’s reaction function. Therefore, they don’t wait for the central bank to act. They adjust financial conditions in response to new data on their own. That buys the ECB some time to assess how the shock develops. If it does as expected, the ECB validates market pricing, like for example earlier this month (NOT an insurance rate hike). If it differs from what was expected (e.g. last year’s tariff shock and markets discounting 1.5% policy rate because of feared hit to growth), it avoids rushing into any wrong policy decision. It is against this framework that markets continue anticipating another ECB rate hike as the energy price shock is expected to start showing through direct and indirect channels. ECB chief economist Lane for example stressed the need to look at how four months of energy-cost increases percolate into food inflation and into services inflation. ECB Sleijpen welcomed the current decline in oil prices, but warned that it remains to be seen what is still in the pipeline. ECB Wunsch added that it took some urgency off the need of another rate hike – “We might not need it as much as we thought in June.” If another hike is required, Wunsch still prefers not to wait for too long. Turning to the data, national June inflation numbers published in France (-0.3% M/M & 2% Y/Y), Italy (0.1% M/M & 3.1% Y/Y) and Germany (-0.2% M/M & 2.4% Y/Y) surprised on the downside of expectations contrary to yesterday’s Spanish numbers (0.6% M/M & 3.6% Y/Y). If any, they suggest that the headline EMU gauge could drop slightly more than hoped in tomorrow’s release (energy-related). Consensus estimate currently stands at 3% Y/Y from 3.2% Y/Y. Core CPI is forecast to hold close to last month’s number (2.5% Y/Y from 2.6%). Services inflation is seen even more sticky at 3.3% Y/Y. European bonds treaded water on today’s news as it doesn’t really alter their view/positioning. Daily changes on the German yield curve currently range between -1 bp and +1 bp. EUR/USD hovers around the 1.14 big figure with the dollar overall failing to profit from highest USD/JPY rates since 1986. It doesn’t really have to surprise as the move occurs orderly for now (162.40 from 161.90). European stock markets add up to 1%, catching up with Monday’s WS gains whereas key US gauges open mixed today. Brent crude moves slightly away from the sell-off low and headline that Iran is not willing to let go plans of controlling the Hormuz.
News & Views
The economic barometer of the Swiss KOF economic Institute showed that the outlook for the Swiss economy improved notably. After remaining below its medium-term average in the previous months, it in June rose slightly above it. The barometer increased by 2.6 pts to 101.2 (from 98.6). On the production side, positive developments are particularly apparent among the indicators within manufacturing. On the demand side, both the indicator bundles for foreign demand as well as for private consumption showed a favourable outlook. Today, the Swiss National Bank also revealed that it had bought the countervalue of CHF 3.9 bn foreign currency in the January March period. These interventions are in line with the SNB warning that it had an increased willingness to intervene in the currency market in case of a rapid and excessive appreciation of the Swiss franc. As global tensions eased and the market took into account the SNB willingness to intervene if necessary, the Swiss Franc during the month of June eased from the EUR/CHF 0.91 area to currently trade slightly above 0.922.
Polish inflation declined by 0.5% M/M in June, easing the Y/Y measure to 2.5% (from 3.1% in May), exactly at the NBP policy target. The release only provided few details. Food prices declined by 0.7% M/M and were also 0.7% lower compared to the same month last year. Prices for electricity, gas and other fuels declined by 0.4% M/M to still be up 4.8% Y/Y. Fuel prices declined by 7.4% M/M to be up 5.3% Y/Y (from 12.3%) in May. The slowdown in (headline) inflation was more than expected. The data support the mild rhetoric from the National Bank of Poland (NBP), which indicates that rates can stay at the current level for some time to come. Polish money markets almost fully priced out any NBP rate hike. The zloty recently lost some ground. EUR/PLN is nearing the 4.30 area that marked the top of EUR/PLN price action since the start of the conflict in the Middle East.
