Macro

UK:
During the ECB’s annual Forum on Central Banking, Bank of England (BoE) Governor Andrew Bailey expressed that UK interest rates are likely to remain elevated for a longer duration than what financial markets anticipate. Derivative instruments indicate a potential increase in borrowing costs from the current 5% to 6.5% by the year-end, followed by a decline in late spring 2024. Bailey noted the market’s belief in a short-lived peak and highlighted the persistence of inflation as a factor to consider. He emphasized that BoE’s rate decisions would be driven by evidence, assessing both the peak level of rates and the duration of the peak’s sustainability.

EU:
According to an initial estimate by the European Union’s statistics office, annual inflation in the eurozone decelerated for the third consecutive month in June, dropping to 5.5% from May’s 6.1%. This figure was below the 5.6% forecast by economists polled by FactSet. Core inflation, which excludes energy, food, alcohol, and tobacco prices, slightly increased from 5.3% to 5.4%.

Reports from the ECB’s annual Forum on Central Banking indicated that policymakers are leaning toward voting for another interest rate hike in July. ECB President Christine Lagarde acknowledged the significant progress made in combating high inflation but cautioned that victory cannot yet be declared. Lagarde highlighted uncertainty regarding the influence of tight labor markets and substantial wage increases on prices, suggesting that the central bank is unlikely to confidently assert that peak rates have been reached in the near future. However, some Governing Council members, including Vice President Luis de Guindos, expressed less certainty about a September hike, emphasizing that the decision will depend on incoming economic data.

US:
Inflation data released on Friday had a positive impact on sentiment. The Commerce Department reported a 0.1% increase in its personal consumption expenditures (PCE) price index for May, bringing the year-over-year increase down to 3.8%, the lowest level since April 2021. The core PCE index, which excludes food and energy, fell back to 4.6% on a year-over-year basis, still above the Federal Reserve’s 2% target but alleviating concerns about a reacceleration of price pressures after the upside surprise in April.

Weekly jobless claims defied expectations and experienced a significant drop of 26,000 from a 20-month high to 239,000, marking the sharpest decline since October 2021. Continuing claims also surprised on the downside, reaching a four-month low.

The University of Michigan revised its measure of consumer sentiment upward, reaching its highest level in four months. The chief researcher of the survey attributed this “striking upswing” to the resolution of the debt ceiling standoff and positive sentiments regarding easing inflation.

Durable goods orders increased by 1.7% in May, surpassing consensus expectations of a decline of approximately 1%. Notably, orders excluding the volatile defense and aircraft segments, which are considered a reliable proxy for business investment, rose by 0.7% after a previous decline.