• Recession fears continue to haunt European markets. The EMU PMI last week falling below the 50 boom-or-bust level and yesterday’s poor German IFO flagged a sharp deceleration of activity going into H2. Russia reducing gas supply a few days after restarting deliveries via the Nord Stream 1 pipeline only highlights the risk for a big winter supply shock paralyzing key parts of the economy. EMU bond investors increasingly embrace the recession narrative. German yields again tumble between 7.5 bps (2-y and 30-y) and 9 bps (5 & 10-y), the belly of the curve outperforming the wings. After clearing key 1.12%/1.18% support, the German 10-y yield (0.92%) decisively slips below the 1.0% barrier. The 10-y euro swap (1.74%) extends its journey south of 2.0%, with next support near 1.63% (May bottom). Short-term yields show a bit more resilient. Even so, markets ever more question whether the ECB will be able to hike its deposit rate above 1.0% going into the end of the year. Interesting to see whether EMU CPI data later this week will be able to at least partially rebalance the market focus from growth back to inflation, annex the ‘unavoidable’ need further ECB tightening. On intra-EMU bond markets, Italy underperforms (10-y spread vs Germany +5 bps) as markets question the country’s access to next tranches of the EU recovery fund as the country’s reform agenda might stall due the upcoming elections. US yields also stay on a downward trajectory as markets are counting down to tomorrow’s Fed policy decision. Will the Fed also slow the pace of rate hikes beyond tomorrow’s widely expected 75 bps hike? US yields are easing between 4bps (2-y) and 7 bps (5/10-y). European equities are ceding up to 1.0%. The Nasdaq opens with a similar loss. Despite recessionary fears, cyclical commodities including copper, iron ore and oil show tentative signs of bottoming after recent setback. The reference Dutch gas contract jumps to the highest level since March (194.5 EUR/MWh)
• Of late, a ST topping pattern in the US dollar and last week’s ‘unexpected’ 50 bps ECB hike temporary gave the euro some reprieve. However, with any upside attempts decisively blocked in the 1.0275 area, EUR/USD today again fell prey to the forces of gravity, trading near 1.0140 compared to opening levels around 1.0220. The move this time was mainly euro weakness rather than USD strength. USD/JPY even declines marginally (136.3). EUR/CHF even dropped to a new multi-year low (0.9770) illustrating the euro underperformance. EUR/GBP also dropped to the 0.845 area, even as cable struggles not to fall below the 1.20 barrier.
• The Hungarian central bank (MNB) lifted policy rates by 100 bps. The base rate now stands at 10.75%. On Thursday, the central bank will bring the one-week deposit rate to that same level. Underpinning the decision are strong and intensifying price pressures. Inflation hit 11.7% in June, core measures even 13.8% y/y. Rising costs continue to quickly feed through to consumer prices, the MNB says. With prices expected to keep accelerating into the autumn months, risks for second-round effects build unabatedly and must be addressed. The MNB will continue the cycle of interest rate hikes until the outlook for inflation stabilizes around the MNB’s 3% target in a sustainable manner and inflation risks become evenly balanced. The Hungarian forint left intraday lows behind after the policy statement was published but risk-off limits the currency’s upside. EUR/HUF is trading around the 400 barrier.
• Europe already reached a political agreement to cut the use of gas by 15% next winter. The Commission proposed to do so only last week. The fast approval comes as the threat of Russia fully cutting off gas supplies is increasingly turning reality after the country announced it will take another turbine offline for maintenance. Supplies from Wednesday on will reduced from 40% of capacity to just 20%. Gas consumption cuts are voluntarily though can become mandatory under request of at least 5 countries or if the Commission deems there’s a high risk of a shortage. Both scenarios need majority backing from member states.