Bank of England convenes for an interim monetary policy meeting

Markets

Markets entered some kind of post-FOMC stalemate as more individual Fed governors show their true colors. Atlanta Fed Bostic joins Dallas Fed Kaplan in the 2022 rate hike camp. He argues in favour of a near term start of tapering net asset purchases. Boston Fed Rosengren is like NY Fed Dudley on the soft side of the aisle, playing down risks of permanent high inflation. Washington-based Fed governor Bowman didn’t touch on monetary policy, but her comments suggests that she didn’t really sort it out yet. She believes that upward price pressures may ease as bottlenecks are worked out, but she’s doesn’t really sound confident in how long this process might take and is willing to adjust her outlook as needed. The latter suggests a soft stance for now, but readiness to switch sides if inflation remains too high for too long. Markets so far ignored most of the Fed speak as the hot shots mostly stick to Powell’s line. US yields added 2-3 bps in a daily perspective in a slight bear flattening move. The $61bn US 5-yr Note auction had a slight tail and an average bid cover. German Bunds outperformed US Treasuries in a daily perspective with the belly of the curve marginally outperforming the wings. Yields fell 0.5 bps (2-yr) 1.4 bps (10-yr). 10-yr yield spreads vs Germany ended near unchanged. EUR/USD ended a tad softer around EUR/USD 1.1930. A lacklustre attempt to push the greenback south after disappointing, but still sky high US services PMI, failed miserably. Today’s EMU and US eco calendars suggest that the current deadlock will remain in place.

EUR/GBP recorded its lowest closing price since early April at EUR/GBP 0.8541 ahead of today’s big day. The Bank of England convenes for an interim monetary policy meeting. In May, they decided to keep their asset purchase target unchanged, but to slow the weekly buying dynamic. By doing so, they bought time to fend off rate hike pressure. Under the previous pace, purchases would end somewhere at the end of October/early November. Now the tipping point is pushed towards the end of the year. The next monetary policy report is only due in August, suggesting that today’s meeting might be a dull one decision-wise. The BoE will on the one hand acknowledge the recent higher than expected inflation development. Price pressure breached the 2% target for the first time in almost two years. On the other hand, they’ll remain cautious on the recovery outlook with PM Johnson’s delay to completely reopen the economy also buying time in the normalization process as it will take longer to see the full economic effects. From a sterling point-of-view, there might be room for some slight short-term disappointment.

News headlines

In the semi-annual report on inflation, the Bank of Korea said the economy is facing rising demand-side inflationary pressures as the recovery speeds up while some price dampening government measures are also set to fade. Inflation in May accelerated to 2.6%, above the BoK’s 2% target. Governor Lee Ju-yeol recently hinted multiple times at policy normalization to take place sooner rather than later but so far refrained from directly mentioning a move would come already this year. That changed during the briefing following the release of the report, where Lee also repeated that the current policy stance of 0.5% interest rate was “significantly accommodative” and that it would remain so even if the BoK would hike one or two times.

US Treasury Secretary Janet Yellen urged lawmakers once again to raise or suspend the debt limit again after the current suspension ends July 31. After that deadline, Treasury can resort to special measures to avoid defaulting on maturing debt repayments but Yellen warned that those emergency procedures may be exhausted as soon as August. The pending debt ceiling issue is also seen as one of the key factors contributing to the liquidity glut pressuring money market rates with Treasury drawing down its huge cash balance while reining in bill issuance.

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