Wednesday, July 5, 2023

Daily Market Overview

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• With markets awaiting the restart of US trading, the China Caixin services PMI confirmed recent disappointing data, pointing to a lackluster recovery in the Chinese economy. This put markets in a mild risk-off modus that deepened throughout the European session. According to the ECB monthly consumer expectations survey, consumers saw inflationary pressures easing. Perceived inflation over the previous 12 months in May decreased to 8.0% from 8.9%. Median inflation expectations for the next 12 months also eased slightly from 4.1% to 3.9%. Expected inflation 3 years ahead was unchanged at 2.5%. Consumers also turned more cautious on nominal spending in a context of a mild recession (growth for the next year expected at -0.7%). At the same time, the EMU June final composite PMI was also downwardly revised into ‘contraction’ territory (49.9 from 50.3). European bonds jumped higher after the release, with German yields initially up to 5 bps lower. However, they found a bottom in the run-up to the US trading session. German yields currently are changing between -3.0 bps (2 & 5-y) and +0.5 bps (30-y). US data (factory orders) will only be released after finishing this report, but probably are no market mover. The main dish for US markets comes later today, with the Minutes of the June 14 Fed meeting. Markets will look out for the argumentation of a Fed rate skip while at the same time the majority of Fed governors in the dots still saw a potential need for two additional rate hikes. US yields show a (mixed) steepening with the 30-y +3.0 bps. The two 2-y yield (4.91%) pauses ahead of the 5.0% barrier (-3.0 bps). Global risk sentiment remains negative with the Eurostoxx50 again drifting away from the cycle top (-0.8%). US indices open about 0.5% lower. Brent oil ($76.0 p/b) is testing first resistance near $78 p/b as talk on OPEC+ production cuts (Saudi Arabia & Russia) continues.

• Again no big moves in the major FX cross rates. EUR/USD hovers near the 1.09 pivot. The USD/JPY uptrend for now is taking a pause (144.40). Sterling is taking a breather after yesterday’s rally (EUR/GBP 0.857). UK bonds continue to underperform (5-y yield +5 bps).

 News & Views

• Turkish inflation accelerated in June with the monthly pace picking up from 0.04% to 3.92%. The significant increase, even as it was slightly below expectations, came after household gas prices were statistically recorded as zero in May. President Erdogan back then offered families one month of free natural gas ahead of the elections. A dramatic decline in the Turkish lira since Erdogan’s reelection also fanned (imported) inflation. The currency in June fell more than 25% against the US dollar as the new finance minister in a turn towards policy orthodoxy eased the FX controls that were artificially containing the lira’s decline. Yearly price pressures eased from 39.59% to a still stunning 38.21%, which is miles above the 5% central bank target. Core inflation on the other hand quickened from 46.62% to 47.33%. These high inflation numbers mean the real policy rate is still deeply negative, despite last month’s 650 bps increase to 15%. The CBRT did say it plans to tighten policy further, be it gradual. The lira, however, is in need of a decisive, not gradual, response to inflation. USD/TRY today extends gains (TRY loses) towards 26.08. Finishing above 26.05 would mean a new closing record high for USD/TRY.

• Sweden’s Swedbank/Silf services PMI plunged from a downwardly revised 49.2 in May to 46.1 in June. Barring an only marginally lower reading in February this year (46), it’s the lowest outcome since the pandemic in 2020. Details were horrible with business volume dropping to 46.5 from 50.6, new orders venturing deeper in contraction territory (45..4 from 48.9) and employment also hitting a sub 50 figure (49 from 53.9). Combined with Monday’s 44.8 manufacturing PMI (a bit less worse than the 41.5 expected), the composite PMI hit a post-pandemic low of 45.8, signaling economic contraction across the private sector. The Swedish krone picked up the weak data points today. At current levels of 11.83, EUR/SEK is set for the highest close on record. The pair end last and earlier this week intraday hit even higher levels of 11.85. The currency is trading in the defensive for several months now on a combination of high inflation, a too slow Riksbank response, general economic uncertainty and concerns about real estate turbulence potentially sparking financial instability.

Graphs & Table

EUR/SEK: Swedish krone nears all-time low after as PMI dives deeply in contractionary territory.

EUR/TRY: lira only a wisker away from all time low against the dollar. Gradual CBRT tightening doesn’t suffice.

EMU 2-y swap eases from recent top on risk-off sentiment and as EMU consumer inflation expectations are easing.

S&P 500 snaps a 5-day winning streak.

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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