• Frontloading policy tightening is the talk of the town on interest rate markets these days. The Bank of Canada was leading by example as it yesterday raised its policy rate by 100 bps The move was justified as serving a soft landing as it hopefully removes the need to raise rates higher and longer further down the road. A 9.0%+ US inflation print fully opened the debate whether the Fed should consider a similar move on July 27. Markets think it’s likely. This morning, the Monetary Authority of Singapore and the central bank of the Philippines provided evidence that the frontloading recipe is broadly applicable. Strong labour data caused the debate to spill over to Australia. EMU markets of late were focused on recession risks rather than on the need for aggressive ECB anti-inflationary action. Yields recently even were at risk of falling below key supports (2-y swap 1.05/10% area, 10-y swap 2.0% area, 10-y Bund 1.15/18% area). Investors finally realized that the ECB in one why or another will also face the question how far it can stay behind the curve as inflation mounts. Short-term EMU yields intra-day jumped almost 20 bps, but ‘enthusiasm’ faded later. German yields currently rise between 12 bps (2-y) and 2.5 bps (30-y). Aside from inflation fear and recession risk, EMU bonds (and the euro) are facing a new headwind from a political crisis in Italy. A no confidence vote might cause PM Draghi to resign. Next steps in the process are unclear for now. The combination of higher yields, the Italian crisis and global risk-off widens the Italian 10-y spread over Germany by 16 bps. Spain/Portugal add 6 bps. The US flattening trend continues with yields rising between 10 bps (5-y) and 3 bps (30-y). US data were mixed with the headline PPI printing higher than expected at 11.3%, but jobless claims rising 244k. Persistent political uncertainty annex recission fears keep European equities in the defensive (Eurostoxx -1.5%). First US Q2 earnings from major banks also didn’t help sentiment (S&P -1.5%). Brent oil extends its journey below $100 p/b ($ 97.25).
• Anticipation on potential Fed frontloading keeps de dollar in the driver’s seat.
The DXY index (108.8) is touching the highest levels since September 2002. This move is mainly driven by USD/JPY as the pair surpassed the 139 big figure. EUR/USD initially copied the price pattern from the previous days, hovering between 1.005 and 1.0000, but finally forced the break (0.996). Interestingly, the Aussie dollar and even more the loonie
don’t profit from the CB’s proactive monetary policy. The Canadian dollar even underperforms against the euro (EUR/CAD gains 2 big figures, 1.316). The sterling rally from last week/early this week also stalls. EUR/GBP rebounds to the 0.846 area. News Headlines
• Hungary’s EU funds minister Navracsics told the Mandiner weekly that they don’t rule out the possibility of accepting the jurisdiction of the EU’s chief prosecutor. Orban earlier called such measure a red line which infringes on national sovereignty. However, the PM is getting in dire straits when it comes to funding his lavish fiscal policy. Over the past weeks, his cabinet has been courting the EU in order to overcome their stand-offs and secure the release of EU funds under the multi-annual budget framework and pandemic-related. The EU delayed disbursements of up to €37bn, about €10bn of which can’t be recovered after the end of this year without deal. The forint strengthened slightly on the news, from EUR/HUF 412 to 407. Earlier on the day, the local currency tended to weaken following the Hungarian national bank’s decision to keep its 1-week deposit rate unchanged at 9.75%.
• Swedish inflation (CPIF; CPI with fixed interest rate) unexpectedly accelerated by 1.2% M/M to 8.5% Y/Y (from 7.2% Y/Y), the highest level in over three decades. The monthly change was mainly driven by price increases in transport (mainly higher fuel prices). All other categories rose as well with lower prices on clothing (seasonal summer sale) being the exception. The Swedish swap yield curve bear flattens significantly today with yields rising by 18.3 bps (2-yr) to 6.7 bps (30-yr). Money markets discount a 100 bps (!) rate hike by the Riksbank in September. As we’ve seen before over the past weeks/months, the local currency doesn’t really profit from this frontloading for rate hikes. EUR/SEK trades stable around 10.60.