European stock markets are flat at the start of what’s likely to be a quiet session; the FTSE 100 barely changed in the first hour at 7,525 and the DAX up 0.1% touching 16,105. US markets are shut for the July 4th holiday and closed early yesterday with modest gains, with Tesla rallying 7% on record delivery numbers. Yesterday’s ISM manufacturing index fell to 46, its lowest level since 2020; the prices component also slumping...disinflation and recession signals but not enough to spook the market too much. The Eurozone final manufacturing PMI for June also fell to its weakest since May 2020, prices charged falling at the fastest clip in three years...but the ECB is ratcheting up the hawkish language – risk of policy mistake has never been higher. US 2yr yield moved to 4.925%, highest since March…10s2s inversion hit more than 110bps, the widest since 1981. 

We’ve talked before about how central banks are going to have to allow/accept underlying inflation is going to be higher for longer in the post-pandemic world – whether they should do that tacitly or formally is up for debate – changing the mandate from 2% to 3%, for instance, would surely further de-anchor expectations and make matters worse. At the same time they won’t throw the kitchen sink at getting core from 3% to 2%. So it’s interesting to hear from new Bank of England rate setter Megan Greene, who writes in the FT that it would be a “mistake” for central bankers to think “that inflation and rates will automatically go back to the low levels we saw before the pandemic”. The public think the same: UK one year ahead consumer expectations for inflation increased to 5.0% in June from 4.7% in May, according to Citi. So, we get central bankers expressly saying inflation won’t come back down easily and consumers buying it...not going to help. With the market thinking the BoE is getting bounced into a way more hawkish position than it wanted to be in gilts keep moving in one direction – the UK 2yr rose above 5.4% for a new 15-year high yesterday and trades just a smidge below this level this morning. Cable trades a little under 1.27 with the dollar flat this week. 

Sainsbury’s says food inflation is starting to fall, echoing Tesco comments. Disinflation just means prices not going up as fast as they were...core remains too high still as we detailed yesterday in the H1 recap. SBRY shares fell at the open as it reported a 9.8% rise in like-for-like sales ex-fuel, with grocery +11.0%. As ever with SBRY it’s a question of margins but encouraging to see volume growth despite the strong inflation environment and Argos +5% is good given the electricals market.  

Elsewhere

Casino up 12% on cash injection, whilst Ryanair reported record passenger volumes for June with traffic up 9% to 17.4m. China is restricting the export of two metals used in semiconductors in response to Western chip curbs– Yellen travels to Beijing later this week. The US is looking at restrictions on Chinese companies’ access to cloud services. German exports fell 0.1% in May.  

Oil rallied yesterday but failed to hold gains as Russia said it would cut exports by 500k bpd and Saudi Arabia confirmed its would extend its additional 1m bpd production cut into August and likely beyond.   

The Reserve Bank of Australia took the cover of a sharp drop in inflation last month to pause rate hikes. The RBA left the main cash rate unchanged at 4.1%. As well as the disinflation print, minutes from the last meeting had suggested the hike in June was a close call. This is more likely a comma than a full stop - the RBA said that “some further tightening of monetary policy may be required”.