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• Minutes of the July ECB meeting provided some distraction in the countdown to tomorrow’s Jackson Hole address by Fed Chair Powell. They showed that the decision to break guidance of a 25 bps inaugural rate hike and instead lift-off with a 50 bps move was backed by a very large numbers of members. Some argued for the flagged 25 bps with recession risks looming. The 50 bps move had a strong signaling function. It needed to show the ECB’s determination to act and to fulfill its (inflation) mandate. The worsening inflation outlook was the obvious other reason to frontload policy normalization. It’s also the reason why Lagarde and co won’t back down at upcoming policy meetings. EMU money markets currently discount a continuation of the 50 bps pace in September and October. The ECB refrained on purpose from providing such specific guidance for upcoming meetings. Giving forward guidance on interest rates was a powerful instrument in times when interest rates were close to the effective lower bound, but its usefulness was judged as being significantly diminished in the normalization phase. Specific guidance would excessively constrain the central bank’s optionality, flexibility and data-dependence. Markets didn’t react to the release of the Minutes. Neither did they pay any attention to stabilizing August German business sentiment or slightly lower than expected weekly jobless claims in the US. Overall, we’ve seen some relief on recent bond market sell-off. UK yields drop 4.8 bps (30-yr) to 13.4 bps (2-yr) in a daily respective. German yields return up to 7 bps at the front end of the curve. The decline of US yields ranges from 0.3 bps for the 30-yr and 2.4 bps for the 2-yr. European stock markets started strong but couldn’t hold on to this momentum. They are currently turning intraday gains into intraday losses. US equities open mixed with Dow Jones 0.2% weaker and Nasdaq 0.5% stronger. The dollar initially suffered some follow through weakness following yesterday’s failure to set new highs, but gradually restores the balance throughout dealings. EUR/USD changes hands around 0.9965. Sterling remains in technical no-man’s land at EUR/GBP 0.8450. Brent crude holds strong above the $100/b barrier ($102).
• The British retail sector, according to a monthly survey of the Confederation of British Industry (CBI), showed remarkable strength in August. The retail sales balance indicatorunexpectedly jumped from -4 in July to 37. Orders placed at suppliers also improved from -13 to 1. Expected sales for September improved from -14 to 31. At the same time, questions from a quarterly survey indicated that inflationary pressures continue building with the indicator of selling prices rising from 77 in May to 87 in August, the highest level on record. A CBI economist indicated that despite sales growth in August, companies were the most downbeat on activity in the next three months since the 2020 first COVID lockdown. The business situation index declined to -22 from -13 in May. Retailers’ downbeat investment intentions is also seen as a sign of difficult times ahead for the sector.
• In the minutes of its July meeting, the National bank of Poland assessed that economic conditions in Q2 remained favorable even as growth decelerated. The historically low unemployment rate was accompanied by significant wage rises even as this process showed signs of slowing. Slower growth was seen curbing wage growth beyond 2022. Inflation was expected to stay high in the coming quarters but “the coming years would see a gradual decline in inflation towards the NBP target, which would be supported by the expected weakening of economic conditions, along with the fading of the impact of the shocks that were currently boosting prices as well as the NBP interest rate hikes implemented so far”. The MPC also hopes a stronger zloty in line with fundamentals to help to curb inflation. Certain Governing Council members judged that the disinflationary process might proceed slower than indicated in the projection, due to, among others, the possible fiscal policy easing. After a setback recently, the zloty today slightly rebounded to EUR/PLN 4.755.
Graphs & Table
Dutch gas future (TTF): accelerating towards spike high reached at the onset of the Russian invasion. Winter is coming.
EUR/PLN: Polish zloty catches a break, in line with core bonds
USD/CNY: combination of dollar strength and yuan weakness. Monetary and fiscal policy easing to back growth weigh on CNY
S&P 500: losing 4100 area would signal start of technical retreat
This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.
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