- The European Central Bank hiked rates for the first time since 2011 with a 50bps hike to its main policy rates, taking the deposit facility to 0%, ahead of market expectations of -0.25%. The large kick-off to the ECB’s normalisation of policy comes from an “updated assessment of inflation risks” and the bank signally that “further normalisation of interest rates will be appropriate.” The ECB also seems to have dropped its commitment to forward guidance, saying decisions would be taken on a “meeting by meeting approach.” The bank also announced its new antifragmentation tool, the Transmission Protection Instrument, which will not be “restricted ex-ante”, offering a potentially limitless ability to respond to financing crises hitting Eurozone economies. According to the ECB’s statement, the “scale of TPI purchases depends on the severity of the risks.”
- Turkey’s central bank kept the one-week repo rate, its main policy rate, unchanged at 14%, holding rates steady at every meeting so far this year. The central bank noted that job creation in Turkey has been stronger than peer economies while tourism is helping to improve the country’s current account balance even as high energy costs “keep the risks on current account balance alive.” The central bank expects prices to move lower on some of the steps that have already been taken in lieu of hiking rates, including increasing reserve requirements and risk weightings for certain commercial loans.
- The Bank of Japan kept policy rates unchanged at its latest meeting, holding the policy balance rate at -0.1% and keeping the yield curve target for the 10yr JGB yield at 0%. The BoJ did revise their inflation expectations for 2022, however, to 2.3% on the core CPI from 1.9% previously. For the next two years the BoJ does expect inflation to move back below the 2% target, returning to the endemically low inflation in Japan. The bank also lowered their GDP forecast for 2022 to 2.4% from 2.9% previously. Core prices in Japan rose by 2.2% in data released earlier today
- The South African Reserve Bank hiked rates by 75bps to 5.5% at its latest MPC meeting with further hikes ahead. Inflation has been running hot in the country and jumped sharply in its most recent print while the SARB will want to ensure that a policy differential with the Federal Reserve doesn’t narrow. ZAR strengthened sharply in the immediate wake of the decision.
- Initial jobless claims in the US rose by 7k to 251k in the week ending July 16, their highest level sine November last year and higher than market expectations. New jobless claims have risen for three weeks in a row though in context still remain quite low by historic standards. Overall the US labour market still appears quite strong though the gains in the jobless filings will become a worry if their pace accelerates or they drift upward incessantly.
Today’s Economic Data and Events
- 10:00 UK Retail sales June: forecast -0.2%
- 11:15 FR Composite PMI July: forecast 51.1
- 11:30 GE Composite PMI July: forecast 50.2
- 12:00 EC Composite PMI July: forecast 51
- 12:30 UK Composite PMI July: forecast 52.4
- 16:30 CA Retail sales m/m May: forecast 1.6%
- 17:45 US Composite PMI July: forecast 52.4
Fixed Income
- US Treasuries followed bunds in moving stronger overnight after an initial slump to the ECB’s decision to hike rates by 50bps. Yields on the 2yr UST fell by 14bps to 3.0850% while the 10yr yield dropped by 15bps to 2.8747%. Markets will now turn their focus to the Fed meeting next week and whether the FOMC will be tempted by a 100bps hike given that central banks globally look to be front-loading their tightening of policy. That said, a large miss on the Philadelphia Fed manufacturing index will mean the recession narrative isn’t far from market minds.
- European bonds closed mixed after an initial sell-off in response to the 50bps hike from the ECB and the announcement of the TPI, the central bank’s new bond buying tool. Yields on the 10yr bund closed down by almost 4bps to 1.213% while Italian yields soared almost 15bps to 3.52%. The ECB didn’t explicitly lay out what market conditions would trigger use of the TPI and thus there may be an immediate widening of peripheral bond spreads over bunds.
- South African bonds rallied sharply, with yields down 19bps to 11.161% as markets seem to price in that the SARB will get inflation under control via large rate hikes. Elsewhere emerging European bonds tilted toward positive with Polish 10yr yields down 39bps to 6.13% and Romanian yields falling by 11bps. Turkish 10yr yields fell by 10bps to 16.7% after the CBRT held policy unchanged.
- Fitch affirmed their rating on National Bank of Egypt at ‘B+’ with a stable outlook.
FX
- The euro led gains against the dollar overnight, pulling higher in response to the ECB’s decision to hike rates by 50bps. EURUSD settled up 0.49% at 1.023 though it has given back a good share of those gains in early trade today. The ECB appears committed to a further tightening of policy though the uncertainty around the TPI will leave some room for doubt. USDJPY fell by 0.6% even as the Bank of Japan stuck with its continuity policy of keep rates highly accommodative. GBPUSD managed to reverse the prior day’s losses and rallied by 0.18% to 1.1995.
- Commodity currencies were strong as a rule with USDCAD down by 0.12% to 1.2868. AUDUSD rose by 0.67% to 0.6934 while NZDUSD add 0.2% to 0.6252.
Equities
- Global equity markets were generally higher overnight with the Dow Jones up 0.5% and the S&P 500 adding nearly 1%. The NASDAQ managed a stronger gain, rising by 1.4%. European bond markets closed higher as well with the EuroStoxx up 0.3% while the FTSE 100 settled with a moderate upward bias. Asian markets have opened strongly today with the Nikkei adding 0.2% and the Hang Seng gaining by 0.7%.
- Local markets performed very well overnight with the DFM rallying by 1.4% and the ADX up by 2.3%. The Tadawul in Saudi Arabia gained 1%.
Commodities
- Oil prices clawed back some sharp losses on the day but still settled lower in both the Brent and WTI markets. Brent futures settled down 2.9% at US 103.86/b while WTI closed down by 5.8% at USD 96.35/b. Russia and Saudi Arabia have discussed cooperating under the OPEC+ framework, according to a report issued from Russia.
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