• German Bunds vastly outperform US Treasuries today. Yields in the country drop 6.5-14.8 bps with the front end of the curve particularly in market’s focus. Comments from ECB’s Knot were responsible. The Dutch central bank governor is known as an outspoken hawk but in an interview with news agency Bloomberg today he struck an unusual neutral-to-dovish tone. Knot said that core inflation looks like it has plateaued. While labeling a July 27 rate hike as a given, he called any increases after that “at most a possibility”. It all comes down to the data between next week and September. Knot did call into question Italian governor Visco’s view of inflation hitting 2% sooner than the ECB’s official forecast of 2025. That suggests he still favours a high-for-longer strategy. European money markets stepped further away from a peak policy rate at 4%. Such a scenario gets attributed a 40% chance vs 60% yesterday. US rates eased 4-7 bps going into the publication of the June retail sales. Last month’s volumes sold were revised up by 0.1-0.2 ppts, downplaying the miss for the headline number which came in at 0.2% m/m vs 0.5% consensus. More importantly, a core gauge used to calculate GDP and which excludes food services, auto dealers, building materials and gasoline stations rose a firm 0.6%. At the very least it points at consumer resilience. Yields whipsawed in the immediate aftermath but eventually returned to levels seen prior to the release. UK gilts hold a road somewhere between Bunds and UST’s. British yields fall 6.5-8 bps as investors await tomorrow’s inflation data. Stocks fluctuated throughout the day, flipflopping between minor gains and losses. The EuroStoxx50 sheds 0.2% at the time of writing.
• General volatility on FI markets is much higher compared to FX. EUR/USD went for a test of the 1.1274 resistance level but first Knot and later US data killed off the attack pretty soon. The pair is currently trading near intraday lows around 1.123. DXY sticks around below 100. EUR/GBP surpassed 0.86 for the first time since the beginning of this month but Knot’s comments killed off that adventure quickly. The combo is now changing hands in the 0.856 area. The Japanese yen is better bid following the drop in core bond yields. USD/JPY moves south to 138.21. EUR/JPY joins that downleg to 155.27. The Canadian dollar faces conflicting signals from the June CPI numbers (see below).
News & Views
• According to the UK government agency insolvency services, the number of registered company insolvencies in June 2023 was 27% higher than in the same month in 2022. The agency also specified that this is higher than the levels seen when the government support measures were in place in response to the coronavirus (COVID-19) pandemic and also higher than pre-pandemic numbers. The data suggest that the combination of lower demand due to the cost of living crisis, higher interest rates and rising wage coast are taking their toll at least on part of UK enterprises. On a completely different topic, a YouGov poll published today showed that 57% of Britons indicated that the decision to leave the European in 2016 was wrong. 32% still consider it a correct decision. 55% of the respondents now indicated they would vote to stay in the European union while 31% said they still would opt to stay out in case a referendum was to be held now.
• Economic data released in Canada today showed a mixed picture. Headline CPI in June decelerated faster than expected to 0.1% M/M bringing the Y/Y measure down from 4.0% to 2.8%. A decline to 3% was expected. So, at least headline inflation returned within the 1-3% Bank of Canada target band for the first time since March 2021. However, the decline in the core median (unchanged at 3.9% Y/Y) and core trim (3.7% from 3.8%) which are closely monitored by the Bank of Canada was slightly less than expected. Goods inflation slowed to 1.4% Y/Y. Services inflation printed at 4.2% down from 4.6% Y/Y. At the same time, housing starts unexpectedly jumped to an annualized rate of 281.4k from 200k in May. Last week, the BoC for the second consecutive meeting again rose its policy rate by 25 bps to 5.0%. The Bank paused its hiking cycle in March and April. In last week’s communiqué the BoC assessed that ‘with three-month rates of core inflation running around 3½-4% since last September, underlying price pressures appear to be more persistent than anticipated’. The Canadian 2-y yield eases 4.5 bps, but this is probably mainly due to overall market trends. The loonie is losing modest ground against the dollar with USD/CAD trading near 1.3220 from a close near 1.32 yesterday evening.