June 29, 2023

Daily Report 29/06/2023

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In comments on Wednesday, Bank of England Governor Bailey stated that the data showed a clear persistence of inflation and that it will be a worse outcome if the bank doesn’t bring inflation down. He also pointed to a very robust labour market with a smaller workforce than was the case before the covid outbreak. Although the comments from Bailey were broadly hawkish, there was a net decline in Sterling yields on the day with the 2-year yield below 5.20%. Sterling was also vulnerable to a liquidation of long positions following a sharp build-up in positions over the previous week.

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German consumer confidence declined to –25.4 for July from –24.4 previously and weaker than consensus forecasts of –23.0. There are still dovish voices within the ECB as council member Centano, for example, stated that over-hiking is not an acceptable position. He added that the economy is already taking a hit while inflation is easing as quickly as it went up. Fellow council member Muller stated that the bank needs to look at the data for a rate hike beyond July while Vujcic stated that there was a good case for a hike in September. At this stage, the hawkish voices maintained a dominant position with strong expectations of a July rate hike. The overall hawkish ECB rhetoric helped underpin the Euro on the main crosses, but rate hikes have been priced in.

Key Data 

13.00 German Consumer Price Index (MoM) (Jun) Exp. 0.2% Prev. -0.1%
13.00 German Consumer Price Index (YoY) (Jun) Exp. 6.3% Prev. 6.1%

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The US May goods trade balance narrowed to $91.1bn from a revised $97.1bn the previous month and below expectations of $92.9bn. Although there was a small decline in exports, this was more than offset by a sharper decline in imports. Fed Chair Powell commented that he believes that there is a more restrictive policy coming. He added that data on jobs, activity and inflation have all been strong over the past quarter and policy has not been restrictive for very long. He also stated that labour costs are high in non-housing services and that the Fed needs to see more softening in the labour market to help bring inflation under control. There was certainly no sign of Powell adopting a more dovish stance on the policy outlook. Following the latest comments, there was a further shift in Fed Funds rate futures with the chances of a July hike seen at close to 85%.

Key Data 

13.30 Gross Domestic Product Annualised (Q1) Exp. 1.3% Prev. 1.3%