• European (GDP) data are seldom determining drivers for markets. However, today’s data mix with the first estimate of EMU Q2 growth and the preliminary EMU CPI at least provided an interesting challenge after the recent sharp repositioning on interest rate markets. Europe is expected to be headed for a very difficult H2, if not an outright recession. Admittedly, GDP data are backward looking in nature. Even so, at 0.7%Q/Q and 4.0% Y/Y the EMU Q2 GDP estimate smashed expectations by a margin that was seldom seen. Countries like Spain (1.1 Q/Q, 6.3 % Y/Y), Italy (1.0% Q/Q, 4.6% Y/Y) and France (0.5% Q/Q, 4.2% Y/Y) posted growth that in a European context usually are associated with an economic boom, rather than an economy heading for recession. Germany didn’t bring a similar positive surprise (0.0% Q.Q and 1.5% Y/Y). Still, the starting point going into H2 is better than feared. At the same time, EMU July headline inflation rose a faster-than-expected 0.1% M/M and 8.9% Y/Y, the highest level on record. Core inflation also turned back north from 3.7% last month to 4.0%. There are few signs that inflation will cool soon. The ECB last week abstained from giving any forward guidance. The pace of rate hikes at upcoming meetings will be determined by incoming data. Today’s data at least raise the case for another 50 bps September hike. Market pricing currently still is more or less halfway between a 25 and a 50 bps hike. German yields are rebounding about 8 bps across the curve except for the 30-y (4.4 bps). Given recent freefall, this is hardly more than a technical correction. We keep a close eye at ECB comments in the wake of today’s data. Data yesterday showed that the US growth in Q2 was negative for the second consecutive quarter. Fed’s Bostic today joined Powell’s view that the US is not in recession. The Fed needs to take further action to tame inflation. The June PCE deflator still rose a strong 1.0% M/M. US yields are rebounding between 7.0 bps (2-y) and 2 bps (30-y). Equities continued their recent rebound, probably mainly driven by better than expected earnings rather than macro data. The EuroStoxx50 gains 1.20%. US indices rise more modestly (S&P 500 +0.6%) despite strong earnings from tech bellwethers yesterday evening.
• On FX, the euro again tried to go higher in the 1.02 big figure on the strong EMU data, but the move again failed miserably. The 1.0278 top wasn’t even tested. The pair currently again trades in the 1.0175 area. ECB’s de Guindos indicated that the weak euro was an element in the July ECB policy assessment. The DXY index dropped temporarily below 106 but more than reversed the earlier decline (106.55). Similar pattern for USD/JPY (134.4). The Swiss franc rally took a breather (EUR/CHF 0.9735). Sterling also eases with after a strong run this week (EUR/GBP 0.8400).
• Polish July headline inflation flatlined at 15.5% y/y with monthly price pressures slightly below expectations at 0.4%. A drop in fuel prices (-2.6% m/m) accounted for much of the sharp monthly deceleration. That said, KBC Economics estimates that core inflation went up by 9.7% y/y, quickening from 9.1% the month before and meaning that it is too soon for the National Bank of Poland to declare victory on inflation just yet. Short-term Polish swap yields were inclined to advance on the publication but soon reversed course in risk-on trading. The curve steepens with losses of 6 bps at the front. The zloty is today’s CE outperformer though. EUR/PLN eases from 4.76 to 4.73.
• The Czech economy unexpectedly expanded by 0.2% q/q, crushing consensus for a 0.4% contraction, preliminary data showed. Year-over-year the economy is now 3.6% bigger. According to the Statistical Office, growth was powered by the services sector, which reaped the benefits from easing Covid measures. The industrial sector tough stagnated at relatively low levels. In the expenditure approach, domestic demand was the main growth source, compensating for weaker net exports. This probably won’t last in the second half of this year and early 2023 though, as high prices bite and consumer confidence has dropped significantly. The gas situation in the winter will prove critical for GDP as well with the Czech economy highly reliant on Russian supplies. The Czech crown loses against the euro today, extending a gradual weakening trend since mid-July. EUR/CZK trades near 24.62.