• European markets are supposed to face multiple event risk this week. The ECB will likely start policy normalization with a 25 bps rate hike, but a 50 bps step still isn’t completely ruled out. The bank also will have to come up with a convincing, but ‘politically acceptable’ new tool to address market fragmentation. Aside from ECB policy, European investors face the uncertainty of the reopening of the Nord Stream 1 Russian gas supply (or the absence of it) and a potential political crisis in Italy. Last but not least, on Friday, the EMU July preliminary PMI is at risk of flagging a standstill in European growth, maybe even worse. Given these event risks, one would expect something different compared to what appeared on the screens this morning. European equities rebounded, yields at some point jumped 10+ bps and EUR/USD touched an intra-day peak near 1.0175. The reason for this optimism wasn’t that easy to find in hard data or other news. From a European point of view, today’s market reaction suggests that some investors are pondering how much recession risk is discounted after recent repositioning. Globally, markets apparently also feel a bit more at ease as Fed comments suggested that the bar for 1.0%pt rate hike is high. Even a convincing anti-inflation approach leaves room for the Fed to keep an eye at other factors except killing inflation at any cost. Whatever the driver, German yields are rising between 6 bps (2-y) and 8 bps at longer tenors. Also remarkable, the 10-y Italian spread versus Germany reversed a (modest) widening to currently ease 6 bps even as the Italian Parliament will vote on the Draghi government on Wednesday. Broader markets also remain in risk-on modus. US yields are gaining 5/7 bps across the curve. European equities (including Italy) are gaining about 1.0%. US indices also opened up to 1.25% higher on solid earnings of some major banks.
• On FX markets, the dollar continues the correction off the recent multiyear top. The DXY trade-weighted index currently trades near 107.5, down from 108-area early in Asian dealings this morning (but off the intraday low). The correction in USD/JPY remains modest (138.25). EUR/USD also trades off the intraday peak (currently 1.014). Still, even in a more constructive environment the case for a sustained euro rebound probably isn’t that strong. From a technical point of view, EUR/USD needs to regain 1.0350 to call of the downside alert. Even after current rebound, this level still is some distance away. Sterling outperforms both the dollar and the euro. BoE’s Saunders in a speech indicated that the BoE policy rate might need to surpass 2.0% as the labour market will remain tight despite growth slowing, raising the risk for more persistent wage and price rises. EUR/GBP trades near 0.8460 (0.85 area this morning). Tomorrow’s UK labour data and Wednesday’s June price data are the next important reference for UK markets in the run-up to the August 4 BoE policy meeting.
• Polish core inflation as calculated by the National Bank of Poland amounted to 9.1% in June, up from 8.5% the month before. That’s slightly less than the 9.3% analyst consensus. Monthly dynamics remained at a strong 0.6% though decelerated from the 1% in May and also below expectations (0.8%). Three other core indices constructed by the NBP all continued to rise further into the double digit area as well, ranging from 10.7% to 15.9%. The data confronts the central bank with the need for further tightening. That said, the today’s constructive risk setting depresses Polish swap yields across the curve. Moves range between 10 bps and 38 bps lower. The Polish zloty strengthens marginally though left intraday highs behind. EUR/PLN trades at 4.78.
• The Kingdom of Belgium successfully tapped three outstanding OLO lines for a total amount of €3.712bn today. It tapped OLO’s 91 (€0.93bn 0.0% Oct2027), 94 (€1.60bn 0.35% Jun2023) and 95 (€1.18bn 1.40% Jun2053). Bid-to-cover ranged between 1.56 and 2.08. The Kingdom has now completed 78% of this year’s €41.2bn OLO funding needs.