• “Expect a decisive June meeting, and an active summer”, French ECB governor Villeroy said today in a speech. He also stressed the central bank “carefully monitor(s) developments in the effective exchange rate, as a significant driver of imported inflation”, echoing comments made last week. It is an umpteenth indication for a rate hike lift-off in July. Last week, even president Lagarde hinted at such a move. Unfortunately, risk-off kept markets too busy to pick it up back then. But calm returned somewhat at the start of this week. European equities are still down but don’t face the sizeable losses seen last week. WS opens up to 0.4% in the red. German Bunds underperform US Treasuries in fixed income. Yields rise 2.9-4.3 bps across the curve. The European Commission slashed growth and jacked up inflation forecasts in its latest economic update. The war in Ukraine adds to high energy and food prices (today’s surging wheat price serves as point in case) and already snarled supply chains while simultaneously weighing on economic confidence. GDP is now expected to rise 2.7% this year, down from the 4% pencilled in earlier. Growth next year could slow further to 2.3%. Inflation on the other hand would average 6.1% in 2022, up from 3.5%, before sharply easing to 2.7% in 2023. The Commission warned for risks “skewed heavily towards unfavourable outcomes”. In the most severe alternative scenario where Russian gas flows were cut outright, the economy would barely grow this year (0.2%) while inflation would shoot up to more than 9%. US yields tried to recover from early Asian weakness following a poor Chinese economic update. But the move ran into resistance soon. Treasury yields currently trade 0.8 to 1.7 bps lower, with the 30y yield being an exception (+1.5 bps).
• The euro heard Villeroy’s speech too but we admit it required eagle eyes to spot it. It only highlights the common currency is in dire need of actions, not words. EUR/USD ekes out a small gain to 1.043 and thus remains in the danger zone. The trade-weighted greenback eased to 104.38 after testing, but failing to take out the 105 mark last Friday. Sterling is losing out a little vs. the euro and the USD as it awaits the BoE’s performance before the Treasury Committee this afternoon, PM Johnson possibly scrapping key parts of the NI protocol as soon as tomorrow and an extensive economic update (labour market, CPI, retail sales) later this week. EUR/GBP stays north of 0.85.
• The National Bank of Poland published core inflation data for the month of April. Net of food and energy prices, prices rose by 1.3% M/M to 7.7% Y/Y, from 6.9% Y/Y in March. It’s the highest level since the end of 2000. This compares to headline inflation running at 12.2% Y/Y. The 15% trimmed mean (excluding the impact of 15% of the price basket characterized by the highest and lowest growth rates) was running at 9.2%, compared to 7.8% a month earlier. The Polish zloty firms today, but stable risk sentiment is probably as much responsible for the move as the core inflation numbers. EUR/PLN is changing hands around 4.66. The Polish central bank is on an aggressive tightening cycle which already lifted the policy rate to 5.25%. Polish money markets take into account a cycle peak in H2 this year of 7.5%.
• The US Empire Manufacturing index (NY region) crashed in May from 24.6 to -11.6. Consensus expected a more modest setback to 15. The May outcome suggests that the April reading was the odd one out. The index in the first quarter of this year fell from 31.9 to -11.8 in March. Sub-zero levels point to economic contraction in the sector. Details showed sinking new orders (-8.8 from 25.1) and shipments (-15.4 from 34.5) as main culprit. Employment and average workweek broadly stabilized. Prices paid cooled off a cycle peak. Looking forward, business conditions six months ahead rose marginally from 15.2 to 18 which compares to a 6-month average of 28.3. The disappointing NY Fed index is the first of several regional gauges to be published in coming weeks. We look for more evidence of a stalling sector in Thursday’s Philly Fed Business outlook.