Risk-off returns, inflation data in focus

Market movers today

We look forward to the panel discussion between Bank of England's Bailey, Fed's Powell and ECB's Lagarde today at 15:00 CET and any clues of how policymakers plan to tackle global inflation pressures.

German and Spanish inflation figures for June will give important clues ahead of Friday's euro area HICP release. We expect that German HICP inflation will continue to rise, closing in on the 9% level, as government tax rebates on fuel are more than offset by continued rises in food and core inflation.

In Sweden, we get May figures for lending to households. In the NIER confidence survey we anticipate another weak(er) reading for consumers (indeed, the May retail sales was a real disappointment), construction (higher rates, lower housing prices) and possibly manufacturing (cf. the negative April PVI production print). We also look for signs of stabilisation in the so far simultaneous rise in manufacturing, services and retail selling price expectations that could signal a peak in price pressures.

The 60 second overview

Risk sentiment: Markets returned in a risk-off mode on Tuesday as recession fears took centre stage again. With month-, quarter- and half-year end approaching, portfolio rebalancing may explain some of the moves. Recently, it seems markets have been caught in between positioning for a 'peak inflation' and fine-tuning expectations of the necessary magnitude of central bank tightening vs. a 'stagflation scenario' where growth would slow down markedly but central banks would be forced to continue to hike aggressively as inflation remains high.

NATO summit: Finland and Sweden took historical steps on their path towards NATO membership yesterday as Turkey dropped its objection to the membership bids. In an MOU document signed on Tuesday, the three countries agreed on how to address Turkey's security concerns that have blocked Finland and Sweden's accession talks thus far. Already on Tuesday evening, there seemed to be different interpretations of what the text actually means as the Turkish Presidential Office announced Finland and Sweden would make changes in their legislation while the interpretation in Finland was that no such changes were required. Nevertheless, the MOU removes a key obstacle at this point and clears the way for the next steps in the accession process. We still expect it to take months until each member state has ratified the new Treaty after which the two countries will officially become members of the alliance.

G7: Yesterday, the G7 leaders agreed to explore further ways to prevent Russia from profiting from its warfare. For oil, they will consider options for a possible comprehensive prohibition of all services which enable transportation of Russian seaborne crude oil and petroleum products globally unless the oil would be purchased at discount. The leaders also committed to end new direct public support for the international unabated fossil fuel energy sector by the end of 2022, except in limited circumstances. According to G7, investments in LNG sector are necessary and can be promoted with public investments.

Equities slid lower over the session, ending in a sharp US sell-off after recession signals from macro data. The US underperformance was enhanced by big tech selling off again, with growth underperforming 170bp vs value which enhanced the US underperformance. All sectors dived except energy, led by tech, consumer discretionary and communication services. Interestingly, the recessionary trade, such as underperformance of banks and industrials, or for that matter small caps, did not materialize. Again, an illustration that markets have taken height of a lot of negativity. S&P 500 -2.1%, Nasdaq -3% Dow -1.6% and Russell 2000 -1.9%. Futures are higher this morning. 

FI: After an initial sell-off from the morning, likely supported by improving COVID situation in China (shorter isolation period) as well as hawkish Kazaks saying that it is worth looking at 50bp in July, rates markets traded virtually sideways through the rest of the day. For Germany it was essentially a parallel shift on the day of the curves higher by 6-7bp across the maturities. With ECB month-, quarter- and half-year end, and absence of significant data releases, it has mostly been sideways trading this week, despite TLTRO early repayment set to settle today and last net purchases under the APP is to take place. Inflation data today will be closely watched.

FX: Amid risk appetite re-souring during the US session yesterday cyclically sensitive currencies such as SEK and GBP weakened while the USD gained. EUR/USD is now back towards the 1.05 threshold.

Credit:  Credit markets went back into risk-off mode on Tuesday along with some of the major equity indices in Europe and the US. Itrax Main widened 3.1bp to close at 112.3bp, while Xover widened 14.4bp to close at 550.6bp. The Nordic real estate sector was especially hard hit on Tuesday, with hybrid capital on some of the stronger investment grade rated names, widening more than 100bp.