Fit for 55

Market movers today

German Chancellor Angela Merkel visits the White House to meet with President Biden. Discussions over the Nord Stream 2 will likely be on their agenda.

Fed Chair Powell and Chicago Fed President Evans speak in the afternoon. The US Empire and Philly fed manufacturing indices for July are also due out and a key question will be whether supply disruptions and input cost pressures are starting to ease.

Early Friday morning, we expect Bank of Japan will keep policies unchanged. Renewed restrictions in Tokyo will keep the domestic economy weak well into Q3 and postpone any potential withdrawal of the pandemic stimulus. It will be interesting to see the details on the BoJ's new scheme to boost funding for activities related to climate change.

The 60 second overview

Climate: The European Commission unveiled its decarbonisation strategy to cut CO2 emissions by 55% by 2030 ("Fit for 55 package") yesterday. It included an expanded EU Emissions Trading Scheme now adding shipping industries on top of energy and industry sectors as well as a separate new emissions trading scheme for road transport and buildings. So far it is only proposals that will require backing from both the EU parliament and a qualified majority in the EU Council to come into force. See Reuters for more.

Sweden: CPI inflation declined from 1.8% to 1.3% in June in line with the Riksbank's forecast. Thus also muted market reaction.

Equities: Yesterday, Wall Street shares were mixed, with S&P500 ending 0.1% higher and Nasdaq down 0.2%. This morning, Asia is trading slightly lower despite support from Fed chair Powell's reassurance there will be no tapering yet. MSCI's broadest index of Asia-Pacific shares outside Japan is down 0.3% and Nikkei plunged 0.9% weighed down by another surge in COVID-19 cases.

FI: US government bond yields continue to decline despite the stronger than expected US inflation data. However, the Federal Reserve is not about to scale back on the monetary stimulus given yesterday's comments from Federal Reserve chairman Powell. He stated that the US economy has not progressed enough to begin scaling back on QE and that inflation was expected to rise further before falling back later this year. Hence US yields declined and the curve flattened as the Federal Reserve is willing to let the economy gather more steam and inflation to rise before scaling back on the monetary stimulus.

FX: Apart from the Reserve Bank of New Zealand (RBNZ) induced NZD strength yesterday was a fairly quiet day for FX majors with very limited moves. NZD gained on RBNZ finishing its QE programme already this July and implicitly signalling an earlier rate hike (May rate path suggested H2 2022). Lower commodity prices following a peak in the global manufacturing cycle as well as New Zealand's low vaccine coverage (16% of population) are some of the downside risks for NZD/USD, even if RBNZ goes forward with the early rate hikes. We emphasize that relative rates are important yet often prove an inferior driver of FX markets compared to global investment themes.

Credit: Credit indices were mixed Wednesday on softer market sentiment following US inflation numbers. iTraxx Xover widened 1.2bp (closed at 233.4bp) and iTraxx Main widened 0.25bp (closed at 46.8bp). HY cash bonds were slightly tighter (-0.8bp) IG cash bonds were marginally wider (+0.4bp).