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By GEOFFREY SMITH
with ANJULI DAVIES, BEN MUNSTER and IZABELLA KAMINSKA
— Fed set to pause, ECB to hike as rate-setters digest U.S. CPI data on Tuesday.
— Turkey’s ‘dream team’ faces a race against time.
— Nigerian central bank governor is suspended after initiating system of parallel exchange rates.
ECB 3.75% ⇡ — BOE 4.5% ⇡ — FED 5.35% ⇡— SNB 1.5% ⇡— BOJ -0.10% ⇣— RBA 4.10% ⇡— PBOC 3.65%⇣— CBR 7.5% ⇣ — BOC 4.75% ⇡ — SARB 8.25% ⇡
Good morning, everyone. I hope you had a lovely weekend and enjoyed the sun. Congratulations especially to fans of Manchester City (who said that money can’t buy you happiness?), and to Novak Djokovic devotees, who will start this jam-packed week with a suffused glow of satisfaction.
The odds are on a relatively quiet start to the week, with both the European Central Bank and the Federal Reserve hunkering down for policy meetings. The Fed announces first on Wednesday, with the ECB coming a day later (which is how they prefer it). The consensus is for a Fed pause (unless May CPI data on Tuesday is phenomenally hot), and for a 25 percentage-point hike from Christine Lagarde & co. What is less certain is how Lagarde and Fed chair Jerome Powell will manage expectations for the second half of the year.
It’s also a huge week for the U.S. bond market, with the Treasury borrowing all along the yield curve in the first series of auctions since the dispute over the debt ceiling was resolved. Chinese lending data for May have the potential to be interesting before that.
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— U.S. Treasury to start flood of debt sales.
— Nigeria suspends Central Bank Governor Godwin Emefiele.
— Turkey’s new economic team faces a run on the lira.
It’s a week in which the bill is coming due in several parts of the world. In the U.S., the Treasury badly needs money after running its cash balance down to only $44 billion as Republicans and Democrats squabbled over raising the debt ceiling. The ‘Treasury General Account’ fluctuated between $200 and $400 billion for most of the five years before the pandemic, so it’s some way off what could be construed as comfortable right now.
In Turkey, meanwhile, two U.S.-trained economists have been given the task of piloting what promises to be the hardest of landings after Recep Tayyip Erdoğan emptied the central bank’s reserves in the defense of his presidency. Read more from me here. There was brighter news across the Aegean on Friday, where Fitch kept its long-term debt rating for Greece unchanged at BB+ with a stable outlook.
And time appears to have run out, too, for Nigeria’s Godwin Emefiele, who currently presides over one of the world’s only operational central bank digital currencies. He was suspended at the weekend by newly-elected President Bola Tinubu, who used his inauguration speech last week to call for an end to Emefiele’s system of parallel exchange rates.
A QUICK HEADS UP. Politico’s new Pro Energy and Climate UK service launches on Tuesday and you can sign up for a free trial of the newsletter here. The team will be led by Russell Hargrave and be supported with reporting from Charlie Cooper and Abby Wallace. The new product will build on Politico’s success covering energy and climate globally and adds to our expanding team of reporters covering Westminster. This is our third Pro policy subscription product in the U.K., the other two being trade and technology, which launched in February this year.
RUSSIA HOLDS RATES: No surprise out of Russia’s central bank on Friday as it held its key interest rate at 7.5 percent for a sixth meeting in a row, but Governor Elvira Nabiullina warned of rising inflation risks, leaving the door open for more hikes in future. Rates peaked at 20 percent in February 2022, after a series of emergency hikes to defend the ruble in the wake of Russia’s invasion of Ukraine. The war has massively increased government spending and resulted in a wide range of western sanctions on Russia.
What’s in store for inflation? Inflation has since come down to the bank’s 4 percent target but the CBR says there are “gradually rising inflationary pressures”. The bank seemed to move further into hawkish territory saying inflation risks had “tilted even more to the upside.” Nabiullina said rate-setters had considered a hike of 25-75 percentage points at the meeting on Friday and that a move in July is possible.
Ruble slide: The ruble is testing a new low for the year, amid heightened uncertainty on the battlefield in Ukraine. It seems just a matter of time before Russia’s official armed forces and mercenaries start firing on each other, after Wagner Group head Yevgeny Prigozhin angrily rejected a call from the Defense Ministry for his soldiers to submit to army authority.
LOCALLY SOURCED DEBT: A new four-year Italian bond targeted at retail investors raised €18 billion by the end of its first placement, a record for a bond of its kind. “The four-year maturity of the new BTP Valore was appreciated by retail investors, who have a preference for short/medium tenors,” emphasized Unicredit fixed-income strategist Francesco Maria Di Bella.
Money (not) in the bank. Offering 3.25 percent for the first two years and 4 percent for the second two, plus a final 0.5 percent coupon, BTP Valore is also more appetizing for Italian retail investors than the average savings account, without being as expensive to issue as the inflation-linked BTP Italia. The proceeds will cover around 5 percent of Italy’s gross borrowing needs this year.
SHAME! Thursday’s newsletter mistakenly identified the BTP Futura as Italy’s inflation-linked retail bonds, so we’re just clarifying it’s not. The Futura, first sold in 2020, has a loyalty premium linked to nominal growth.
SPECTER OF DEFLATION HAUNTS CHINA: Whilst most of the developed world seems to be grappling with inflation, China appears to have the opposite problem. China’s inflation remained close to zero in May and factory gate prices (PPI) fell 4.6 percent on the year, the steepest drop in seven years. Even the price of pork, a Chinese staple and key driver of CPI, fell for the first time in a year. This on the heels of figures earlier this week showing that exports tumbled and manufacturing activity contracted in the world’s second-largest economy. The country is now at risk of a “vicious deflationary loop” according to Oxford Economics, increasing pressure on the People’s Bank of China to cut rates or provide more liquidity.
Time to get spending: The Chinese government needs to get its people spending again if it’s to meet its growth targets. But with youth unemployment at 20 percent it’s going to be a hard sell. There were also reports this week of new measures to be announced to stimulate the housing market including relaxing some home purchase restrictions and cutting agents commissions. There are growing expectations that Beijing could announce new stimulus measures in July after second-quarter GDP figures are released. PBoC Governor Yi Gang said on Friday he expected CPI to rebound to above 1 percent by December. He said the economy was still in a “recovery phase” after Covid-19 but said second-quarter GDP growth would be flattered by a low base last year.
DIGITAL € COMMUNICATION: We are 16 days away from the European Commission’s legislative initiative to lay down the legal framework for a digital euro, writes Bjarke over on Morning Financial Services. And while crypto and payment lobbyists are in a mad dash to get their hands on a leak, deputy finance ministers are focused on one goal — convincing their bosses that it’s a good idea.
Interest in the digital euro has waned among many ministers, who will likely be the ones who have to sell this project to their citizens. There is a handful that believe the project is a solution looking for a problem.
But the European Central Bank’s argument is straightforward. They paint the digital euro as an insurance policy and as being incredibly important for eurozone sovereignty. Just because Facebook failed to launch private money for its social media users, doesn’t mean Big Tech won’t try again. And nobody in Europe wants to be at the mercy of American networks like Visa and Mastercard.
Side-splitting irony: Deputy finance ministers met in the Croatian seaside city of Split — once the home of Diocletian, the Roman emperor best known for crashing the Roman empire with his monetary reforms and questionable new coinage — to discuss the communications challenge surrounding the digital euro ahead of Thursday’s Eurogroup meeting in Luxembourg. The ECB can always come up with flashy marketing slogans and a cool website. But it’ll fall to deputies to bring their bosses onside. It’s a tough ask, considering few know what the digital euro will look like once it’s minted in possibly three years’ time. For now, it’s all about slogans. The digital euro won’t replace cash. The ECB doesn’t want your payment data. Don’t trust crypto.
This might sound trivial. But the digital euro is about to get political. MEPs will soon begin planning their election campaigns for next June, and it’s unlikely that Brussels will have agreed on the digital euro bill beforehand. If the narrative goes awry, then you can expect many MEPs to stand on the soap box to raise the alarm about incoming monetary tyranny. It already happened in April when the subject came up for plenary debate in Strasbourg. The Soviet Union is coming back, some MEPs said due to the ‘gosbank’ nature of the system being discussed. China’s social credit system is around the corner too, said others. YouTube is already awash with these takes. And without the right guidance whispered in EU ministers’ ears, many might be inclined to believe them.
— Free Exchange: a flawed argument for central bank digital currencies (Economist)
— Nigeria’s President Tinubu suspends central bank governor (Reuters)
— Musk’s refusal to pay rent adds to Goldman bad property loans (FT)
— Fueled by Long Credit Binge, China’s Economy Faces Drag From Debt Purge (WSJ)
THANKS TO: Ben Munster, Anjuli Davies, Bjarke Smith-Meyer and Izabella Kaminska.
(Editor’s note: this is intended as a selective list, giving precedence to European events)
MONDAY, 12 June
Turkey current account, 9 a.m.
China May credit data (tentative)
BoE’s Mann speaks, 4 p.m.
U.S. auctions 3-month, 6-month bills, 5:30 p.m.
U.S. auctions 3-year, 10-year notes, 7 p.m.
TUESDAY, 13 June
U.K. NIESR GDP estimate, 3 a.m.
U.K. April average earnings, employment 8 a.m.
U.K. May claimant count, 8 a.m.
The U.K. Treasury Committee hosts an oral session on the appointment of Megan Greene to the Monetary Policy Committee at 10 a.m. BST, London.
Germany ZEW economic sentiment index, 11 a.m.
ECB’s Enria to speak at Goldman Sachs event in Paris, 11:45
ECB Weekly financial statements and APP/PEPP portfolio update, 3 p.m.
U.S. May CPI, 2:30 p.m.
BoE Governor Bailey speaks, 4 p.m.
U.S. auctions 52-week bills, 5:30 p.m.
U.S. auctions 30-year bonds, 7 p.m.
WEDNESDAY, 14 June
U.K. April GDP, industrial production, trade balance, 8 a.m.
ECB May long-term interest rates, 10 a.m.
Eurozone April industrial production, 11 a.m.
U.S. May PPI, 2:30 p.m.
Federal Reserve interest rate decisions, 8 p.m.
Fed press conference 8:30 p.m.
THURSDAY, 15 June
China May retail sales, industrial production, fixed asset investment, unemployment 4 a.m.
Bundesbank’s Nagel to speak on cash provision, 9 a.m.
Bundesbank hosts a symposium on secure cash supply, 9 a.m.
Turkey May budget data, 10 a.m.
ECB governing council decisions 2:15 p.m.
ECB press conference, 2.45 p.m.
U.S. May retail sales, Philadelphia Fed and Empire State manufacturing indices, weekly jobless claims, 2:30 p.m.
U.S. May industrial production, 3:15 p.m.
U.S. auctions 4-week, 8-week bills, 5:30 p.m.
BoE’s Cunliffe speaks with Izabella Kaminska at POLITICO’s Global Tech Day, 5:35 p.m.
FRIDAY, 16 June
Bank of Japan interest rate decisions, 5 a.m.
Bank of Japan press conference, 8:30 a.m.
Bundesbank’s Nagel speaks, 9 a.m.
Eurozone May final CPI, 11 a.m.
Fed’s Waller speaks, 1:45 p.m.
ECB VP de Guindos attends ECOFIN meeting in Luxembourg, 12:40 p.m.
All times CET, unless otherwise
