• Eurozone June PMI’s turned the post-Fed consolidation on interest rate markets into correction. The German yield curve bull steepens with yields sliding by 24 bps at the 5-y tenor to 15 bps at the 30-y. The German 10-yr yield lost very first (minor) support at 1.59% to drop to 1.45%. Next, more important support kicks in at 1.19%. That’s the red line which can’t be lost without changing the market narrative. European swap rates record similar declines today with the 2-y rate approaching 1.5%, the 5-y rate back below 2% and the 10-y rate below similar first support (as the GE 10-y yield) at 2.38%. The expected ECB policy rate peak over the past sessions fell from 2.5% to 2% according to money markets. Zooming in on today’s PMI’s, the composite gauge unexpectedly crashed from 54.8 to 51.9, a 16-month low (vs 54 expected), with weakness both in manufacturing (52 from 54.6) and especially services (52.8 from 56.1). Details showed manufacturing output contracting for the first time in two years (49.6 from 51.3). Companies also scaled back their business expectations for output over the coming year to the lowest since October 2020. The rising cost of living, tighter financial conditions and concerns over energy and supply chains linked to the Ukraine war and ongoing pandemic disruptions are to blame. Price pressures remain elevated at unseen levels, though cost growth shows signs of topping off. Q2 PMI’s signal a growth rate of 0.2% for the quarter, compared with 0.6% in Q1. Forward looking gauges like stalling new business or rising levels of unsold stocks suggest that the worst is yet to come. Job growth could be the next domino to fall. European stocks initially sold off on the national data releases (starting with France), to test the recent lows. A break didn’t occur, with even some minor rebound action higher as markets price out some ECB tightening. We nevertheless stick to our negative view on risk assets whether it comes from feeble growth forecasts, high inflation and/or policy normalization. The 3400 mark in the EuroStoxx50 holds…just…for now at least… The euro traded in the defensive, but losses could have been bigger. EUR/USD currently changes hands near 1.0517. Minor, intermediate support at 1.0469 (yesterday’s low) wasn’t even tested. EUR/GBP returned below 0.86 with UK PMI’s holding stabilizing in contrast to the European ones.
• Bulgarian prime minister Petkov’s government lost a vote of no-confidence in parliament. A former junior coalition partner joined the opposition, resulting in a 123-116 vote against. Petkov’s government was busy trying to break a deadlock in EU enlargement talks with Balkan nations, including the neighboring North Macedonia. The defected junior party was strongly opposed and left the government in protest. Petkov will have to resign and is given the first of three attempts to form a new government. If all attempts fail, president Radev needs to appoint an interim cabinet and schedule snap elections. That would be the fourth one in just two years and could come as soon as September.
• The Norges Bank lifted rates by a bigger-than-expected 50 bps to 1.25% today. It is stepping up the pace from a regular 25 bps on the back of increased inflation forecasts. Prices are expected to grow 4.6% this year (+1.2 ppts compared to March), 3.6% in 2023 (+2 ppts) and will stay above 2% over the policy horizon (2025). The Norwegian central bank reckons that hiking bigger now reduces the need for sharper tightening further out. It estimates the policy rate at an above-neutral 3% by summer next year. Risks point in both directions with a weaker NOK, little spare capacity and sustained global inflationary pressures calling for a higher terminal rates. By contrast, rising rates may cool down the housing market and curb household consumption by more than anticipated, resulting in slower growth and easing inflation. Initial NOK appreciation after the policy decision immediately ran into resistance amid risk-off driven by recession fears. EUR/NOK is hovering near recent highs around 10.48.