• A sigh of relief went through markets today as the first full trading week of July marked a stark difference to the volatile mood swings witnessed in June. The first part of that month was all about central banks raising the inflation alarm. The second part was all about markets sounding the recession alarm. A near empty eco calendar, a more balanced (rate) market positioning and the absence of US investors because of Independence Day all resulted in a calm opening session with bond, stock and FX markets creating some breathing space around key technical levels. The first German monthly trade deficit in three decades grabbed some headlines but did little to unnerve trading. Exports fell by 0.5% M/M (to €125.8bn) while imports rose by 2.7% M/M (to €126.7bn), creating a €1bn deficit. Imported energy inflation is the main culprit of this evolution. Simultaneously, the German export sector is under influence of (Chinese) Covid-lockdowns and restricted business with Russia. The deteriorating current account balance is a phenomenon visible in other EMU countries as well. Turning to the market performances, European stocks gain 0.5% to 1% with the likes of the EuroStoxx50 moving marginally away from the key 3400 support zone. German yields rise around 10 bps across the curve with the German 10-yr yield bouncing off 1.19%/1.16% support after last week’s test. 10-yr yield spreads vs Germany widen by up to 4 bps for Portugal and Italy. The (trade-weighted) dollar trades a tad weaker at 104.90 (from an 105.15 open) which is mirrored by EUR/USD’s marginal gains from 1.0425 to 1.0450. Sterling catches a break by the less volatile and more optimistic market environment with EUR/GBP testing the downside of the upward trend channel since mid-April at around 0.86. Later this week, we eye minutes from the previous Fed & ECB meetings, US non-manufacturing ISM and US payrolls.
• The ECB will take further steps to incorporate climate change into its monetary policy operations. The tilt applies to its corporate bond purchases, its collateral framework, the disclosure requirements and risk management. The measures will be designed in full accordance with the primary objective of price stability. Amongst other steps, the Eurosystem aims to gradually decarbonize its corporate bond holdings by increasing the share of reinvestments towards issuers with a better climate performance. The ECB will also limit the share of assets with a high carbon footprint that can be pledged by individual counterparties and will consider climate risk when reviewing haircuts to corporate bonds used as collateral. Probably from 2026, the Eurosystem will only accept marketable assets and credit claims from companies and debtors that comply with the Corporate Sustainability Reporting Directive (CSRD) as collateral. To improve the external assessment of climate-related risks, the Eurosystem will urge rating agencies to be more transparent about how they incorporate climate risks into their ratings and to be more ambitious in their disclosure requirements on climate risks.
• Even Swiss inflation continues to surprise on the upside. At 0.5% M/M and 3.4% Y/Y, inflation for the fifth consecutive month surpassed the 0%-2% SNB target, reaching the highest level in more than 29 years. Core inflation rose from,1.7% to 1.9% Y/Y. Transportation costs jumped 2.5% M/M. Leisure goods and Horeca also added to price rises. Prices for goods rose 0.8% M/M. Price increases for services remain more modest at 0.3%. The higher than expected inflation adds to expectations that the SNB will raise rates further after it unexpectedly raised the policy rate from -0.75% to -0.25% last month. The Swiss franc didn’t profit even as the SNB recently indicated that a strong currency helps to contain inflationary pressures. EUR/CHF returned back north of parity (1.004). On the other extreme of the inflation spectrum, Turkish inflation in June rose 4.95% M/M and 78.65% Y/Y (from 73.50%).The market still expected an even higher figure. Producer prices printed at 138% Y/Y, the fifth consecutive reading north of 100%. The CBTR kept the policy rate unchanged at 14% since December last year, leaving the real rate deeply negative. The Turkish lira today is losing modest ground with EUR/TRY rising from 17.50 to 17.60