Said Christine, we’ve not reached the peak Of rate hikes, more pain we still seek So, come this July A hike we’ll apply To see how much havoc we’ll wreak
The ECB summer retreat began this morning and ECB President Lagarde kicked things off with the following comments, “It is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached. Barring a material change to the outlook, we will continue to increase rates in July.” That seems like a pretty clear signal that there is no pause on the horizon. Remarkably, the OIS market in Europe is only pricing in a 90% probability of a hike, despite a virtual guarantee from Lagarde. Overall, the market has two more hikes total priced in, with a terminal rate of ~3.90%. If you think about it, that is remarkable considering that core CPI in the Eurozone currently sits at 5.3%! There is an awful lot of belief that despite both lower interest rates and higher inflation readings compared to the US, the ECB is nearly done.
Working in Lagarde’s favor is the fact that Europe appears to be slipping into a recession with Germany already there and the overall data output of late consistently underperforming rapidly declining expectations. In fact, a look at the Citi Surprise Index for the Eurozone shows a reading of -140.20, lower than anytime other than the Covid collapse and the GFC. This is even lower than during the Eurozone bond crisis in 2011-12, which given the dire straits at the time, is really impressive. So, maybe Lagarde and the ECB anticipate a deep recession that will help crush demand and price pressures as well. Of course, she can never actually say that, but who knows what she actually believes. Or…perhaps the ECB have become closet monetarists and are relying on the fact that, unlike the Fed, their balance sheet has actually fallen substantially in size this year, > €1.1 trillion and is tracking lower still. Compare this to the Fed where the balance sheet has only fallen by half as much and perhaps there is hope yet for the ECB.
At any rate, the overall market response to these comments has been nonplussed. It has certainly not engendered concerns in the equity market as European bourses are essentially unchanged on the day. It has not engendered concerns in the bond market as European sovereigns are less than one basis point different than yesterday’s closes, and as far as the currency markets, the euro has edged higher by 0.3%, continuing its recent trend of bouncing off its lows ever so slowly. For the rest of the day, we hear from various ECB speakers and several BOE members, but Powell doesn’t speak until tomorrow, and as we can see from today’s price action, he remains THE man when it comes to moving markets.
In China, they’re getting annoyed That analysts there have employed Some logic and said When looking ahead That stock value will be destroyed
If you want to understand the dangers of recent efforts to censor mis- or disinformation, look no further than China, where last night, three prominent finance writers were banned suspended from their Weibo accounts (China’s version of Twitter) for spreading “negative and harmful information” about the stock market. In other words, after a 20% decline since the beginning of the year and no indication that the government was going to do anything substantive to try to address a clearly slowing economy, they didn’t exhort the public to buy stocks, but rather seemingly indicated they could fall further. Apparently, that analysis is not appropriate hence the banning. At the same time, the PBOC fixed the onshore renminbi much higher (dollar lower) than expected in an effort to slow the ongoing decline in the currency. Since January 16th, prior to last night, CNY had declined more than 8%, pretty much in a straight line. As I have written consistently, with inflation remaining quite low on the mainland, the PBOC seemed fairly relaxed about the currency’s weakness, but I guess that started to get a little out of hand. It remains to be seen if they are going to intervene more aggressively, but the pressures clearly remain for a weaker renminbi. The interest rate differential significantly favors the dollar and that is not going to change anytime soon. As such, given the significant carry advantage for the dollar, I continue to expect USDCNY to rally to 7.50 and beyond as the year progresses.
Otherwise, it’s been a fairly dull session with no other noteworthy news and no critical data. Risk has had a mixed picture with China and Hong Kong rebounding from recent lows on rumors that China was going to add some support, but Japan is continuing its recent correction from a massive run up this year. European bourses are edging a bit lower at this hour (8:00) while US futures are mixed, albeit not really having moved very much.
Bond yields, as mentioned above, are little changed with Gilts (+2.2bps) the only outlier of note. There has been no data from the UK, so I expect this movement is position related more than anything else.
In the commodity space, oil (-1.6%) is once again under pressure as it remains the only market that truly is pricing for declining growth, although most base metals are under pressure today as well. Gold, however, seems to be forming a new bottoming pattern above the $1900/oz level, although given reduced geopolitical fears and, more importantly, still high and rising interest rates, it will be tough for the yellow metal to rise in the current environment.
Finally, the dollar is under pressure again with a bit more universal negativity today. The euro, now +0.45%, leads the way with the rest of the G10 showing far less impetus higher and NOK (-0.1%) unable to shake oil’s weakness. As to the EMG space, ZAR (+1.2%) is the leading gainer followed by PLN (+0.7%) and PHP (+0.7%) showing that the gains are widespread. LATAM currencies are also firmer, but by much smaller amounts. As to the drivers, some hawkish talk from the SARB has traders looking for higher rates for longer, with similar commentary from the Polish Central Bank a key support there. Completing this trio, a change at Bangko Sentral Pilipinas has been coming but the outgoing governor expressed his view that policy would not change, thus keeping relative tightness there as well. I sense a theme. Higher for longer is the central bank mantra virtually everywhere in the world with just China and Japan not playing along.
On the data front, Durable Goods just printed at a much better than expected 1.7% with the ex Transport reading at 0.6%, also firmer than expected. That is certainly a different story than the survey data we have been seeing for the past several months, but it is also going to be confirmation for the Fed that they need to continue to raise rates. Later this morning we will see Case Shiller House Prices (exp -2.40%), New Home Sales (675K), Consumer Confidence (104.0) and Richmond Fed (-12). There are no Fed speakers on the calendar, so I expect that we will take our cues from equities and anything surprising out of Sintra. Right now, the dollar is under gradual pressure, but over time, I continue to believe it will find support on the back of a Fed which is likely to be the most hawkish of all.
Good luck
Adf
fxpoetry 