ECB raises rates by 25bps

Following on from the FOMC on Wednesday, the ECB followed suit with its own 25bps hike at its rate-setting meeting yesterday, taking the deposit rate to an equal record 3.75% on its ninth consecutive hike. The decision had been widely anticipated but the commentary from Christine Lagarde was arguably more dovish than had been anticipated, saying that ‘we have an open mind as what the decisions will be in September and in subsequent meetings’, although she also stressed that any pause would not necessarily be for an ‘extended period.’ Inflation was still well above the target 2.0% level at 5.5% at the last print but it has been moving in the right direction and is well down from the 10.6% peak seen in 2022.

US Q2 GDP growth came in well above expectations at 2.4% q/q annualised, up from Q1’s 2.0%. Consumer spending rose 1.6%, higher than the predicted 1.2% but down from the 4.2% surge recorded in Q1. The data confirms that the US economy is performing more strongly than had been anticipated at the start of the year and Jerome Powell said on Wednesday that the Federal Reserve was no longer anticipating a recession in 2023, but it potentially makes the central bank’s task of clamping down on inflation more difficult. That being said, the core PCE price index, the Fed’s preferred measure of inflation, rose by less than expected at 3.8%, lower than the predicted 4.0% and down from 4.9% in Q1.

Both consumers and businesses were shown by the GDP data to be in robust health, with non-residential fixed investment expanding 7.1% q/q annualised. This business strength appears to have continued through the end of the quarter, with durable goods data for June showing a m/m expansion of 4.7%, the fastest pace in nearly three years. Stripping out transportation and defence, the core measure registered a slower pace of 0.2% growth, however, suggesting that investment (and the figures are not inflation-adjusted) is slowing somewhat.

Weekly initial jobless claims data was also released yesterday, registering 221,000 in the week to July 22, lower than the predicted 235,000 and down from 228,000 the previous week.

Today’s Economic Data and Events

• 10:45 France CPI inflation, % y/y, July. Forecast: 4.3%
• 16:00 Germany CPI inflation, % y/y, July. Forecast: 6.2%

Fixed Income

• US treasuries fell on Thursday on the back of stronger than expected GDP data, leaving the yield on the 2yr UST almost 8bps higher at 4.928% and the yield on the 10yr 13bps stronger at 3.998%.
• UK Gilt yields were mixed on Thursday, with the yield on the 2yr Gilt broadly flat at 5.0%, while the 10yr yield rose 3bps to 4.302%.
• German Bunds made gains on the day, with markets speculating that the end of the ECB’s tightening cycle could be nearing. The 2yr yield fell 5bps to 3.033% and the 10yr yield fell 1bps to 2.467%.

FX

• The dollar rose 0.9% against a basket of peers on Thursday. GBPUSD fell 1.12% to 1.2796, while EURUSD declined 0.97% to reach 1.0979.
• In contrast USDJPY declined 0.5% to 139.48, with reports suggesting that while the BoJ is expected to continue its yield curve control policy on 10yr bonds, it might allow longer-term interest rates to rise “by a certain degree”.
• Commodity currencies were weaker against the dollar on Thursday. AUDUSD fell 0.7% to reach 0.6709, NZDUSD dropped 0.4% to 0.6183, and USDCAD gained 0.1% to reach 1.3224.

Equities

• Asian and European equity markers were buoyed by strong US data and relatively dovish central bank meetings yesterday, with expectations of a coming end to interest rate hikes and the growing likelihood of a soft landing boosting risk-on sentiment. In Europe, the composite STOXX 600 ended the day 1.4% higher, with the DAX adding 1.7% and the CAC 2.1%. The UK’s FTSE 100 added a more sedate 0.2%.
• In the US, equities had been gaining once again earlier in the session but speculation around the Bank of Japan making a monetary policy shift and tolerating higher domestic bond yields later wiped them out. The NASDAQ and the S&P 500 both dropped 0.6% while the Dow Jones closed 0.7% lower.
• Equity markets dipped locally, with the DFM closing 0.3% lower and the ADX 0.1%. In Saudi Arabia, the Tadawul ended the day 0.5% lower.

Commodities

• Oil prices picked up again yesterday on the back of the global monetary policy and growth developments, following the dip seen the previous day. Brent futures added 1.6% to USD 84/2, while WTI added 1.7% to close above USD 80/b for the first time since April, ending the day at USD 80.1/b.
• US inventories data added to the upwards momentum for oil prices, as the EIA inventory report showing crude stockpiles falling 600,00 bbl last week.