Sunset Market Commentary

Markets

With US markets closed in observance of the 4th of July holiday; European based investors couldn’t do much but look forward and count down. Counting down to an almost certain outcome of the UK elections, to President Biden announcing to step out of the presidential race, to the second round of the French Parliamentary elections and to tomorrow’s key US payrolls report. For most of these topics investors have made up their minds. Looking backward, the ECB published the minutes of the its June 5-6 policy meeting when it decided to an inaugural rate cut even as the staff raised its 2024 and 2025 inflation projections. Most MPC members agreed that despite a bumpy road of inflation for the remainder of 2024, the bigger picture remained one of ongoing disinflation. Monetary policy was assessed to have clearly remained in restrictive territory and would continue to do so for some time even if interest rates were cut further. The ECB advocates that, at some point, it was necessary to make a judgement call based on the information available. ’Such an approach should not be seen as conflicting with data-dependence, as waiting for full confirmation would almost certainly imply cutting interest rates too late, potentially creating a significant risk of undershooting the target’. Some members were admitted to have had a dissenting view, but this apparently didn’t change to broader assessment/policy decision. Looking forward, the ECB also ‘commits’ to keep policy restrictive enough for as long as necessary to achieve its inflation target. Market/yields didn’t react to the much anticipated analysis of the ECB minutes. German yields currently rise 1 -1.5 bps across the curve. The euro also remains upwardly oriented trading near the 1.08 pivot. If anything, this has probably more to do with markets being hopeful that the outcome of the French election won’t lead to outright fiscal profligacy and as a softer than expected US payrolls report tomorrow potentially deprives the dollar some of its current interest rate support. European equities continue this week’s risk rebound (Eurostoxx 50 + 0.5%). Sterling trades in perfect calm as UK voters likely rubberstamp a highly anticipated regime change (EUR/GBP 0.8465).

News & Views

Swiss inflation unexpectedly decelerated in June. Headline prices were flat on a monthly basis, lowering the yearly figure from 1.4% to 1.3%. Core inflation eased from 1.2% to 1.3%. Prices for international package holidays and for fruiting vegetables and brassicas increased, the Swiss statistical office noted. Prices of hotel and the hire of private means of transport also increased. Declines in prices of air transport, petrol and diesel as well as clothing and footwear (seasonal sales) offset the previous increases. The Swiss National Bank earlier this month cut its policy rate by 25 bps to 1.25%. The second cut straight was at least partially inspired by the appreciation of the Swiss franc in the run-up to the meeting. EUR/CHF in the meantime recovered again to trade around 0.9712, virtually unchanged vs yesterday’s close. It’s too soon to conclude what today’s outcome means for the September SNB meeting given that there are still two CPI readings and Q2 GDP figures due. But assuming the central bank doesn’t seek an outright supportive monetary policy and the real neutral rate is about 0% or a little above (dixit SNB president Jordan), the room for further rate cuts is currently limited.

Czech retail sales came in to the weak side for the month of May. Sales (excluding motor vehicles) decreased in real terms by 0.1%, the Czech Statistical Office said. The y/y number as a result dropped from an upwardly revised 5.7% to 4.4% (5.3% expected). Non-specialised stores with food, beverages or tobacco and retail sale via mail order houses or via internet supported the year-on-year growth the most. On a monthly basis, automotive fuel and non-food goods sales fell by 0.5% m/m while food increased by 0.6%. Today’s outcome suggests some slack in consumer spending and could ease some concerns at the Czech National Bank. Policymakers are highly attentive of the impact of real household income growth recovering as inflation eases. The CNB cut rates in a 5-2 vote by 50 bps to 4.75%. It strongly hinted at a slower pace of cuts (or even a pause) in forthcoming meetings. EUR/CZK only temporarily rose (CZK weakening) in the wake of the retail sales publication. The pair is currently trading unchanged around 25.14.