CBs Diverging

Europe Stronger; UK Stocks Falter 

Generally higher for European equities with the FTSE 100 looking above 7,650 and DAX to 16,300 in early trading after a positive session on Wall Street saw the S&P 500 and Nasdaq rally for the sixth straight day. Microsoft and Apple both notched record closing highs.   

Tesco shares fell despite the 8% rise in sales – signs grocery inflation is easing; ITV fell as it looked at a £1bn takeover of All3Media in a bid to boost its production division. TV ads aren’t what they used to be and we all know the threat of streamers and competition for eyeballs – content is king.  

Developments for U.S. Monetary Policy 

What have we learned from the central banks this week?  

The Fed is on pause but at the same time looked at the data and said we think we will need to raise twice more...this does not make much sense to me from a purely monetary policy perspective. But because it’s them and because the dots are always a joke I may begin to revise my outlook on how far the Fed might go. And we should note that it’s not just about inflation any more - it seems the Fed probably erred on the side of financial stability in terms of not draining RRP and being able to suck up all the issuance coming over the hill. 

The Data and its Implications 

Cue the jobs data and another month above 260k for initial claims...signs of cracks? JPM in April: “A rising trajectory in [jobless claims] took hold last month ... A sustained move well above 250k in the coming months would send a signal that the economy is sliding into recession.”  

NY Fed manufacturing survey is, well, erratic. Recently this survey has started to look a tad random. It’s gone from -31.80 pts in May to +6.60 pts in June. It may be seasonal, it may be some quirk of the methodology but the way in which it jumped around lately to me speaks of some underlying problem with the data or a genuine picture of the anomalous recovery (no one has measured recovery after lockdown, it’s not a normal business cycle, etc). 

Global Central Bank Divergence  

The ECB is on a hawkish footing and warned about higher wages feeding into more inflation as it raised rates by another 25bps and signaled a hike in July is likely. Core inflation would need to really come down properly to avoid that and another in September, which would see 4%. I note GS has raised its outlook to this.  

The BoJ remains in a totally different place – sticking to ultra-loose monetary policy and forecasting inflation coming down later in the year. Has the BoJ missed the window? The economy is strong now but export-led growth may cool sharply in the latter part of the year as US and European rate hikes feed through. Wages and fiscal policy are going to be key. 

The Bank of England is next week and faces intense pressures from rising wages and persistent core inflation. Gilts have taken a battering this week – the 2yr hitting a new 15-year above 4.95%. Does Bailey lean into market pricing 5.75% terminal or continue to waffle on about not asking for pay rises? If the BoE is now bounced into a much higher terminal rate but it was too relaxed earlier on it would be one of the worst policy failures on record. You go to 4% as fast as hell and wait, you don’t amble along slowly to 6%. The Fed has done a much better job on this. 

Currency Markets and FX Volatility 

Net of this – the euro and sterling are a lot firmer after this week (BoE expected to need to hike a lot more after robust wage data in the UK), the dollar is a lot softer but not as much as the yen. Something we talked about earlier in the year – multispeed CB exits would drive more FX volatility. USDJPY broke out above 141 and the yen also hit a new 15-year low against the euro.  

GBPUSD breakout confirmed but RSI already overbought