It does seem rather poignant that the biggest headline of the week in oil was in fact false and withdrawn. This refers to the ‘flash’ informing us that Saudi Arabia would extend its voluntary cut through December 2024. Nevermind, one might imagine our collective agreeing, at least the US oil reports will give us much to chew over. Those of us expecting some fireworks from the overnight API oil stock report are sorely disappointed as it lands with a bit of a whisper rather than a bang. The expectant crude draw of 2.3 million barrels turned into a mere 800,000 barrels, Gasoline -2.8 million versus a call of -2.1, and Distillate bang on at -100,000 barrels, are the main reasons we have such a benign opening. 

Articles around the state of Russian crude; its seaborne flows being at 6-month lows and how with prices pressing against the $60 sanction price cap, India in particular might have to seek crudes elsewhere are indeed newsworthy and a boon for bulls. However, as the Saudi news awaits continued physical confirmation and the agreement of increased demand by reports from OPEC and IEA fade, it was actually macro-economic news that bolstered our performance and allows Brent to test $80/barrel again.

Canada, a key part in financial market considerations, showed decreased inflation. US retail sales, although slightly lower than predicted still expanded, but the main positive protagonist of positivity came in the unlikely form of dovish language from the European Central Bank. As investors look for today’s eurozone inflation later today, Klass Knot, a member of the ECB governing council said that monetary tightening beyond next week’s meeting is anything but guaranteed. This evoked a rally in European bonds and set much discussion on how interest rates and their global relationships will play out, bearing in mind the FED and ECB decisions next week.

 

GMT +1	Country	Today’s data	Expectation
10.00	EUR	Core Inflation Rate YoY (June)	5.4%
	EUR	Inflation Rate MoM (June)	0.3%
	EUR	Inflation Rate YoY (June)	5.5%

 

A surprise from the ECB?

As we approach next week’s much lauded US FOMC decision on interest rates, the noise that surrounds the world’s most powerful central bank often drowns out the importance of what occurs elsewhere. For it is naïve to think that the US Federal Reserve does not, at least in part, take into consideration the actions of other central banks that impact with soft power such as the Riksbank of Sweden or with force such as the European Central Bank. An unmatched hike by the ECB would not only have investment tourists leaving the US Dollar for higher rate gains elsewhere, but the ensuing dip to the greenback would almost act as an unwanted stimulus in an economy so very much trying to be tamed by Jerome Powell and the rest of the Federal Reserve. 

Christine Lagarde, the ECB President, has for quite some time been vociferous in her attitude in taming inflation. It is difficult to think of anyone more hawkish on the banking world stage. At the end of June’s ECB Forum on Central Banking in Sintra Portugal, Lagarde spoke on the inflationary nature of out-of-control wage rises. The growing services sector in the eurozone area is labour-intensive and the ECB now forecasts that payrolls will increase by 14 per cent by 2025. This is why, Lagarde expanded, interest rates would have to be brought into restrictive territory. Indeed, early in June as the announcement of another 25-basis points rise flashed across the wires, making it 8-straight increases, wires were already speculating that 9-straight increases were more likely as not. This proved somewhat prescient as Lagarde went on to say at Sintra that there was more ground to cover and there would likely be a July rate rise.

Still, Lagarde and other hawks will not be allowed a free hand as individual countries begin to feel the pinch of these restrictive interest rates. “Frankfurt officials haven’t properly understood the nature of inflation that the euro area is currently facing”, Portuguese Prime Minister Antonio Costa said at the end of June. His berating continued and included a charge that the policy was not based on fundamentals and should be geared to families, investment and salaries. This attitude was also taken up in Italy by Deputy Prime Minister Matteo Salvini, describing the ECB rate hikes as ‘nonsense and dangerous’. The veiled ‘Frankfurt officials’ arguably has support from further countries that find current policy overbearing and based too much on German data. A glaring example of this is German June year-on-year inflation being 6.4% whereas in Spain it is under 2%, the actual target for the ECB.

Joachim Nagel, the President of the Bundesbank and Member of the Governing Council of the ECB, has been of late at pains to soften language in interviews. While Nagel does not see a risk of overtightening, a hard landing is unlikely and while a 25-basis points rise in July needs to be done, he was quick to point out to Bloomberg TV that the September meeting and decision would be data sensitive. This dialogue is intended as appeasement for other Euro-nations and as Bloomberg have it, communication is the ECB’s toughest challenge. Despite a more digestible approach, it is hard to imagine that the sensitive data Nagel alludes to would not include whatever decision is made by the US Federal Reserve come September. The July US FedWatch Probability of Rate Hike/Cut tool is pricing an FOMC 25-basis point rise at 97%. It is not realistic to believe that the ECB has not already taken this into account for much of the same reasons as listed above, only this time with resultant effect in the eurozone. The world may well see an easing of pressure articles evoking higher inflation in the Autumn, but it is harder to see the ECB and the FED diverging after such a run in alignment of interest rate action and therefore rate decreases any time soon. The influence of Central Bank decisions will be with markets for some time to come.

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