• The June EMU inflation number tried to derail the short squeeze in core bonds. For a brief moment, it seemed to work, but eventually bonds rallied into the weekend. It immediately marks the start of a volatile summer where market focus will likely shift from inflation towards growth. We hold our view that short term corrections will be followed by a resumption of the bond sell-off later this year when it becomes clear that central banks won’t be in the position to loosen their grip on the normalization cycle because of still-elevated inflation. No matter how the growth picture looks like by then. Turning to the CPI print, inflation rose again by 0.8% M/M to a fresh record of 8.6% Y/Y, marginally beating consensus (8.5% Y/Y). Core inflation notched down a tick (3.7% Y/Y from 3.8% Y/Y) instead of the expected small increase (to 3.9% Y/Y) which was probably related to a one-off discount in German travel tickets (by rail). Today’s outcome suggests that the ECB will effectively step up the pace of its tightening cycle in September (+50 bps). At its June meeting, the central bank said that it would do so if the inflation outlook persisted or deteriorated. Especially for near term forecasts, we’re looking at that second scenario. It didn’t derail the bond rally though in a still sluggish risk environment. The German yield curve bull steepens with yields changes ranging between -11.2 bps (2-yr) and flat (30-yr). The German 2-yr yield (0.5%) loses the upward trend in place since early March. The German 5-yr yield drops below the neckline of double top formation (1.08%) and below the 1% mark for the first time since early June. The medium term uptrend holds just. The German 10-yr yield falls to 1.25% with key support at 1.19% (previous May top) to 1.15% (38% retracement on rally higher since March). 10-yr yield spreads vs Germany narrow by up to 4 bps with Italy outperforming (-9 bps). US yields drop 14.5 bps (5-yr) to 6 bps (30-yr) heading into the long weekend. US markets are closed on Monday for Independence Day. Later today, the US manufacturing ISM for June will still be released. We fear a continuation of the declining trend after the unexpected May uptick. Such outcome would amplify trends lower on stock markets and higher on bond markets. The Japanese yen and US dollar are in a close contest for today’s best FX performer in the tough market context, with JPY slightly gaining the upper hand (USD/JPY 135.40). EUR/USD for a second straight session explores territory below 1.04, suggesting a real test of key support 1.0350 might still be in the cards. Sterling loses out against both the dollar and the euro. EUR/GBP rises towards 0.8663, approaching the YTD high at 0.8721.
• Polish inflation in June rose 1.5% M/M to be up 15.6% Y/Y (13.9% in May). Electricity, gas and other fuels (3.0% M/M; 35.3% Y/Y) and fuels for personal transport (9.4% M/M; 46.7% Y/Y) remain major drivers. Even so, KBC estimates core inflation to be near 8.8% Y/Y. The NBP meets Thursday next week and today’s data suggest that expectations for a 75 bps hike to be reasonable. Still, the NBP faces a difficult balancing act. The Polish S&P global manufacturing PMI dropped sharply further into contraction territory, from 48.5 to 44.5. S&P global mentions ‘breath-taking downturns in orders and output, with rates of decline unheard of outside of the pandemic-related shutdowns of 2020 and the height of the global financial crisis in 2008’. Confidence about the future shrinks. S&P also sees signs of inflationary pressures easing, but they are likely driven by a contraction in demand. The mix of persistent high inflation, a sharp deterioration of the growth outlook and a global risk-off sentiment cause the zloty to weaken above EUR/PLN 4.70. In the Czech Republic, the S&P global PMI also signaled a deterioration operating conditions in the manufacturing sector due to lower production and orders. The headline index dropped to 49.0. The decline in output was the fastest since May 2020. Employment decreased for the first time since September 2020. Cost inflation softens but remains elevated. The koruna eased only marginally (EUR/CZK 24.75) as the CNB is expected to be active in the FX market to prevent any material CZK weakening.