ECB Schnabel interview grabs most of the headlines today. She told Reuters that concerns about the inflation outlook that prompted a 50 bps rate cut in July have not been alleviated. The move was not enough to change the outlook and even a recession on its own would not be enough to tame inflationary pressures. Inflationary pressures will not disappear quickly and handling the risk of inflation expectations becoming de-anchored primes downside risks of growth/recession. Schnabel’s comments are a very strong nod to a new 50 bps rate at the September 8 policy meeting. Such a move is discounted in money markets, but we think markets are too dovish further down the line. They are discounting the deposit rate by around 1% before the end of the year, suggesting that the ECB will slow its tightening to 25 bps moves in October and December. Our preferred scenario includes additional moves of 50 bps. Schnabel’s wild comments come on the heels of this week’s sell-off in core bonds and didn’t cause as much of a reaction. German Bunds underperform US Treasuries. German yields rise slightly across the curve while US yields lose 2 bps (30-year) to 5 bps (2-year).
US eco data cannot explain the difference. US jobless claims fell slightly, from 262k to 250k as the July Philly Fed business outlook diverged from a dire Imperial manufacturing survey earlier this week. The Philly Fed gauge unexpectedly improved from -12.3 to 6.2. Details showed an increase in new orders and shipments as well as number of employees. Prices paid fell to the lowest level since December 2020 in the only similarity with NY survey. This probably reflects a decrease in energy costs. The six-month forward outlook remains depressed compared to the current situation. FX markets remain stoic. EUR/USD is still trading in the 1.01-1.02 area with EUR/GBP hovering around 0.8450.News:
The Norwegian central bank raised its key policy rate as expected by 50 bps, from 1.25% to 1.75%. It is the second consecutive move of this magnitude since the Norges Bank changed strategies back in June: from grading to preloading. And that is exactly what the central bank will continue to do. Governor Wolden Bache indicates that the political rate is most likely to rise in September based on the current assessment of the prospect and the balance of risks. Economic activity is high with little spare capacity. Inflation was considerably higher (CPI-ATE 4.5% Y/Y in July) and more extensive. than projected in June with risk that it stays higher for longer and becomes rooted in inflationary expectations. A markedly higher policy rate is needed to ease pressures in the Norwegian economy and bring inflation down to target even as there is a risk of a sharper slowdown in (global) growth and a cooling of the housing market. This suggests a faster rise in the policy rate, so that the central bank does not need to tighten policy even further later. Norwegian money markets are discounting a political cycle peak of 3.75% early next year. The Norwegian krone gained some ground after the decision with EUR/NOK sliding from 9.90 to 9.83. The NOK exchange curve is becoming even more inverted today with front-end yields rising around 5 bps.The Turkish central bank cut its policy rate unexpectedly from 14% to 13% in a context of 80% Y / Y inflation (24-year high) and an extremely weak currency. Turkish President Erdogan is an outspoken follower of his own unorthodox theory that monetary policy is loosening on inflation. He finally found a TCMB governor willing to walk the talk. The official statement, however, points to the economic side of the story. Leading indicators for the third quarter show some loss of momentum in economic activity. The MPC considers it important that financial conditions remain supportive in order to maintain growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth and increasing geopolitical risk. Therefore, it cut the policy rate by 100 bps, but judges this one-time cut as appropriate given the perspective. The Turkish lira is paying the price with EUR/TRY approaching the YTD high at 18.50.