Muzinich Weekly Market Comment: Spanner in the works?


June 24, 2024

In our latest roundup of developments in financial markets and economies, we look at the reaction to the latest Bank of England meeting and implications of higher oil prices.  

Last week was one of consolidation. Government bond yields fell slightly in most developed markets, with UK gilts outperforming in a week that saw the release of key inflation data and the Bank of England’s (BoE) latest monetary policy meeting.

There was good news for the BoE as May’s consumer prices fell back in line with its 2% target for the first time in almost 3 years,1 beating the European Central Bank (ECB) to the same objective, although the latter had already cut policy rates earlier in the month2 (See Chart of the Week).

Digging into the data, sticky service prices remain a concern. In May, they fell less than expected to 5.7%. As such, it was no surprise to see the BoE leave policy rates on hold at 5.25%. While 2 members of its monetary committee supported a 25-basis points (bps) rate cut, the other 7 members voted for no change.

However, the BoE’s communication following the meeting suggests policy loosening could begin in August, stating those voting for no change saw the decision as “finely balanced” and didn’t think the news on service inflation significantly altered “the disinflationary trajectory the economy was on”.3

The overnight interest rate swap market is currently pricing in a 66% chance for a cut in August and 99% chance by September.4

Carry on credit

Carry was king in corporate credit last week, with emerging-market credit the strongest performer within the high-yield universe. In investment grade, Europe outperformed following a strong French government bond auction. On June 20, France raised €10. 5 billion through the sale of 3-8-year bonds.

Sovereign yields fell across Europe, reversing a selloff at the start of the week that came after disappointing flash June Purchasing Managers’ Index (PMI) data.5 Although the composite PMI remains in expansionary territory at 50.8, it fell well short of economists’ projections of 52.5. An accelerated contraction in manufacturing was the main driver, with the Eurozone Manufacturing PMI falling from 47.3 in May to a six-month low of 45.6 due to a marked reduction in new orders.

The European Commission (EC) reprimanded seven nations, notably France and Italy, for running “big deficits” that leave their budget shortfalls above the euro area’s 3% limit.6  This will subject them to the EC’s Excess Deficit Procedure and potentially significant fines if the issues are not addressed. The next stage will require the delivery of medium-term fiscal plans by September 20, with all seven countries needing to demonstrate their commitment to reigning in net spending over the next four years.

Falling confidence in the private sector and seemingly no alternative but fiscal austerity could again leave the region dependent on ECB policy to support growth. However, the overnight interest rate swap market is only pricing in a 68% chance the ECB will cut in September and just 44bps of loosening for 2024.7

Elsewhere in the markets

Currency and equity markets were quiet last week. If there was a winner, it was oil, up 4% on the week and almost 10% on the month-to-date low. This begs the question: could oil, again, be the spanner in the works that stops central banks from normalising policy and pushes the hoped for economic soft landing into a stagflation scenario?

Oil prices were driven higher by a surprising 2.2 million barrels decline in US crude stockpiles.8 Oil bulls point to the strong dynamics in place for the third quarter, driven by increased road and air travel, while Chinese stimulus measures could also fuel demand. At the same time, supply remains constrained as Russian crude flows fall and with OPEC not due to unwind voluntary supply cuts until October.

Oil price backwardation — a situation where spot prices are higher than futures prices — has accelerated in June. This happens when there is increased short-term demand and is seen as a bullish price indicator. As such, Brent at US$90 — it is currently just under US$83 — is again a possibility.

Chart of the Week: Bank of England back on target

Bank of England back on target

Source: Bank of England, European Central Bank, of June 21, 2024. For illustrative purposes only.


[1] Office for National Statistics, as of June 19, 2024
[2] European Central Bank, as of June 6, 2024
[3] Bloomberg, ‘Closing in on August cut, absent big CPI shock’, as of June 20, 2024
[4] Bloomberg, as of June 21, 2024
[5] S&P Global, Hamburg Commercial Bank, ‘HCOB flash Eurozone PMI, as of June 21, 2024.
[6] European Commission, as of June 19, 2024
[7] Bloomberg, as of June 21, 2024
[8] US Energy Information Administration, as of June 20, 2024

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