• Markets took a guarded but constructive start to a week that might be key in shaping investors’ expectations on the Fed’s (and to a lesser extent the ECB’s) intentions during summer. At the same time, tomorrow’s May US CPI release might still complicate positioning in the run-up to Wednesday’s Fed decision. With especially the US 2-y yield only a whisker away from the key 4.63% resistance (end May top), some consolidation/cautiousness ahead of the Fed policy meeting is quite logical. In technical trade, US yields are changing less than 2 bps across the curve. This evening, the US will sell $40bn of 3-y notes and $32bn of 10-y bonds as the Treasury starts refilling its coffers after the removal of the debt ceiling. Markets will closely monitor investor appetite for the sale. German Bunds slightly outperform. The 2-y & 5-y yield are ceding 3 bps. The 30-y trades unchanged. The ECB on Thursday probably will reiterate that it still has work to do to bring (core) inflation sustainably to the 2% target. At the same time, we don’t expect any detailed guidance yet, especially not on what will happen after the July meeting. This is leaving markets comfortable with discounting a peak ECB rate near 3.75%. The debate on additional steps probably might resurface post summer, when the easy inflation gains due to lower energy prices have materialized, while core inflation at that time still might prove much more sticky. However, it is too early for markets already to make up their mind on the likelihood of such a scenario. Even as the Fed ‘skip scenario’ doesn’t intend to signal the end of the cycle, equity investors apparently still see it as indication of a balanced approach that won’t aggressively kill growth in the near term. The Eurostoxx 50 gains 0.70.%. The cycle top of 4412,88 is still only about 2% away. The S&P 500 (+0.3%) for now also continues its post-March uptrend and nears the August 2022 top. Oil still struggles with Brent ($72,85/b) not that far away from the 2023 lows just above $70/b).
• Technical considerations dominated trading in the major FX cross rates as well. EUR/USD extends its recent bottoming pattern. The 1.0790 area was again tested but upcoming event risk prevented a break (currently 1.077). The yen is going nowhere (USD/JPY 139.30) ahead of Friday’s BoJ policy decision. Sterling today fell prey to profit taking. EUR/GBP this morning extensively tested the 0.8547 area (December low), but rebounded to currently trade near 0.858. Tomorrow’s UK labour market data will be a next reality check on the 5.5% BoE policy rate peak markets currently are discounting.
News & Views
• Czech inflation rose by 0.3% M/M in May, outpacing the consensus estimate of 0.1% M/M. The Y/Y-reading decreased slightly less than hoped, from 12.7% to 11.1%. The May inflation figure was 0.5 percentage point lower than expected in the CNB’s spring forecast though. This was due mainly to weaker-than-expected core inflation and, to a lesser extent, slower annual food price inflation (11.8% Y/Y) and a deeper decline in fuel prices (-21.1% Y/Y). Core inflation slowed to 8.6% Y/Y, reflecting a fading of foreign producer price inflation and a cooling of domestic demand. The latter is causing a gradual correction of the until recently increasing profit margins of producers, retailers and service providers. The CNB predicts inflation to fall to single digits in the summer months and to the 2% inflation target over the monetary policy horizon (Q2-Q3 2024). The Czech Koruna extended last week’s correction with EUR/CZK currently testing the May tops in the 23.75/80 area.
• The Swedish SEB bank housing price indicator jumped by 18 points in June, to 11. The positive reading indicates that, for the first time in a year, more Swedes believe that home prices will rise rather than fall. The Swedish housing market was stabilizing over the past months after losing around 15% from peak levels early 2022. “A combination of the worst interest rate storm passing and a stable labor market is giving households wind in their sails for a more positive view of the housing market,” according to the SEB statement. The Swedish krone holds near (weakest) levels only seen during GFC early 2023 (EUR/SEK > 11.60)..