Market Views

GLOBAL CREDIT BULLETS | Monday, 26 June 2023

Europe – All eyes on Sintra (and CPI).
This week, central bankers are meeting in Sintra to discuss the inflation outlook and guide rate markets for the summer months. They’ll face a tricky backdrop of conflicting economic data. The latest EZ PMI figures from Friday showed a surprising cooling in the services sector, with a decrease from 55.1 to 52.4, thus dragging the composite figure down to 50.8. This figure is only marginally above the contractionary level.
However, inflation remains sticky. Later this week, EZ headline CPI is expected to decrease from 6.1% to 5.6% YoY, while core CPI is projected to reaccelerate from 5.3% to 5.5%. Therefore, it is likely to remain uncomfortably above the target.

UK – Living in another world.
The Bank of England (BoE) accelerated its pace and hiked the bank rate by 50 bps to 5%, contrary to consensus expectations of only a 25 bps move. The action received a surprisingly large majority with a 7-2 vote and followed another strong core CPI beat at 7.1% compared to the survey’s 6.8%, including core services accelerating to 7.4% YoY. The market expects the BoE to hike to a terminal rate of 6.25%, but we believe this is unlikely to be delivered.

Emerging Markets – Dovish pivot comes closer, Turkey comes to its senses.
A slew of emerging market (EM) central banks held rates this week, including Brazil and Mexico, while Turkey finally chose to pursue a more orthodox policy. Brazil’s Central Bank (BCB) kept the Selic rate unchanged at 13.75% after inflation fell to 3.94% YoY in May. The BCB also eased its statement language, indicating potential rate cuts in August. Mexico’s Banxico maintained rates at 11.25% after May CPI decreased to 5.84%. The “higher for longer” guidance remained unchanged. On the other side of the spectrum, Turkey’s Central Bank (BRT) raised rates by 650 bps to 15% after President Erdogan changed the central bank governor. However, the hike fell short of market expectations of a 20% increase. Consequently, the Lira weakened further, falling beyond $25.

Russia – Surprise rebellion undermines Putin.
Wagner leader Prigozhin announced a surprise rebellion against Putin on Friday evening but quickly reversed course on Saturday and fled to Belarus instead. It’s unclear which concessions Prigozhin and Putin agreed upon as part of the deal to retreat, brokered by Lukashenko. However, it’s likely to involve a reshuffling of Russia’s military leadership around Shoigu and Gerasimov. We still need to understand the repercussions, but the internal instability clearly weakens Putin and may ultimately benefit Ukraine.

Algebris Investments’ Global Credit Team

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