• In the statements accompanying the March and May policy decisions, the Bank of England ‘guided’ that ‘If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required’. If these pressure would fade, the debate was open. Two policy members already voted to leave the policy rate unchanged as they assessed that the impact of the energy price shock and other cost push inflation to be unwinding. Using market interest rate curves, inflation even was seen at risk of falling below the target over the medium term. Other MPC members including BoE governor Bailey and Chief economist Pill recently took a more guarded stance but also ‘hoped’ that UK inflation was close to a turning point allowing to open the debate on the BoE nearing the top of its hiking cycle. The UK inflation data published today at least made it very clear the BoE has much time left to debate the consequences of a fast fall in inflation. UK headline inflation indeed ‘eased’ from 10.1% Y/Y to 8.7% Y/Y, but this was still much higher than expected (8.2%). M/M price rises even reaccelerated from 0.8% to 1.2%. Core CPI (ex food and energy) jumped from 6.2% from 6.8%. Goods inflation still rose 0.8% M/M while services inflation jumped 1.6% M/M. The inflation shocker caused a massive repositioning on UK interest rate markets. UK bond yields currently add between 20 bps (2-y) and unchanged (30-y), with especially longer term yields substantially higher immediately after the release. Money markets discount that the BoE will (have to) raise its policy rate to at least 5.25% by autumn. ‘Luckily’ for the BoE, next (May) inflation data will be published the day just before the June 22 policy decision. Remarkably, the sharp rise in UK yield didn’t help sterling. EUR/GBP briefly tried a test below the 0.8660 support, but this was almost immediately reversed. EUR/GBP again trades near 0.87. FX market apparently don’t like ‘forced’ rate support. The feeling is that the BoE only raises rates to what is strictly necessary rather than take a really proactive action to eradicate inflation. In this respect, the BoE policy approach in one way or other is facing a similar, admittedly more modest, FX reaction as is the case for the likes of the Riksbank or the Norges Bank.
• Building on yesterday’s price action, global market stay in risk-off modus. The Eurostoxx 50 is shedding 2.0%. The S&P 500 opens about 0.5%% lower. Uncertainty on US debt ceiling remains a source of investor caution. Declines in cyclical commodities including copper suggest lingering doubts on growth. US yield are trading little changed (2-y benchmark change). German yields are easing between -1.0 bp (2-y) and -5 bps (30-y). German Ifo business confidence printed weaker than expected at 91.7 from 93.4, on a decline in the expectations sub-index. The risk-off initially supported the dollar, but gains could not be sustained. DXY temporarily broke above the 103.6 resistance, but again trades little changed (103.5). Similar narrative for EUR/USD, testing 1.0750/60 before returning to 1.078.
News & Views
• Belgium business confidence declined from -7.8 to -9.2 in May. Sentiment in all sectors but trade deteriorated. The latter turned less negative (from -15.9 to -9.2) mainly on improved demand expectations. In manufacturing (from -12.1 to -14.3) expected demand and to a lesser extend employment were the main factors weighing. In business-related services (from +11.4 to +10.5) a better assessment of current activity did not make up for weaker activity expected going forward. The building industry (from -5.4 to -6.6) suffered from a sharp deterioration in orders. National Bank of Belgium also published its quarterly business survey on credit conditions. 39% indicated to see conditions being tight, (from 34.3%), the highest since 2009. The quarterly worsening was most outspoken in the manufacturing (38.8%, up from 30.5% in January) but the services sector still finds itself most constrained (41.1%).
• Riksbank deputy governor Floden said the Swedish krone is “clearly undervalued”. EUR/SEK today rose beyond recent highs to 11.50 amid risk-off. It’s the weakest level for the krone on record aside from a six-day period in March 2009. The SEK has been losing significant ground for quite some time already. It has recently drawn the attention of the central bank as a weak(ening) currency thwarts the fight against inflation. The Riksbank raised rates to 3.5% in April and won’t meet until June 29, giving it few official opportunities to address the matter. Floden said concerns about the Swedish economy are a factor but overblown, saying it is strong, with well-functioning frameworks, strong public finances and efficient wage formation. But at the same time the country’s very rate-sensitive housing market is faltering and weighing on sentiment and spending.