By Jane Foley, senior FX strategist at Rabobank
Sweden has taken a big step forward in its bid to join Nato following the decision by Turkey’s President Erdogan to “forward the accession protocol” as soon as possible.
Sweden has made various attempts to win the support of the Turkish government, including the passing of new anti-terrorism laws. This is in response to Erdogan’s original calls regarding measures to curb supporters of the Kurdistan Workers party, which is classified as a terrorist organisation by Turkey and the EU, UK and US. Yesterday Erdogan linked Sweden’s membership to Nato with Turkey’s own wait to join the EU. Sweden agreed to actively support efforts to reinvigorate Turkey’s negotiations on this front, but Secretary General Stoltenberg made clear that this was not an issue for NATO.
Attention at today’s Nato summit is turning to Ukraine’s bid to join the coalition.
Yesterday evening Ukraine’s President Zelensky tweeted that “we already understand the fact that Ukraine will be in the Alliance”. Reuters reported that differences amongst diplomats were narrowing. The discussion is focused mostly on how quickly Ukraine could join Nato after the war and under what conditions.
The markets are in a more optimism frame of mind this morning on the hope that the Fed’s tightening cycle is drawing to a close and also on Chinese measures aimed at supporting its property market. Regulators extended some of the policies that were introduced in a rescue package in November. Some outstanding loans will be given a one-year repayment extension which should ease short-term financial pressures on property developers. This has not dimmed wider calls regarding the need for restructuring in the sector. That said, state run financial newspapers have reportedly been flagging the likelihood of more supportive policies for the property sector today.
The Fed’s Bostic, a non-voting dove, reiterated his view that the Fed can be patient since policy is already in “restrictive territory”. Bostic is in a minority of Fed officials who does not support further tightening this year. Comments from Daly and Mester, who are also non voters this year, both called for higher rates yesterday. Mester suggested that rates need to “move up somewhat further” and then stay there for a while to allow more data to accumulate.
There is little doubt in the market that the Bank of England has more work to do to tame UK inflation. At last night’s annual Mansion House event BoE Governor Bailey referred to the ‘unexpected resilience’ of the UK economy which has exacerbated wage and demand pressures. Chancellor Hunt used the event to warn that inflationary pressures meant that responsible decisions have to be taken on public finances, including public sector pay. His calls for wage restraint were brought into focus by this morning’s release of UK labor data. May weekly earnings excluding bonuses was a stronger than expected 7.3% 3m y/y in line with an upwardly revised number for April. The ONS reports that the estimate number of payrolled employees for June 2023 shows a monthly decrease of 9K m/m. However, the less tight profile of the UK labour market is yet to be demonstrated in nominal wages, suggesting that the Bank of England will have to maintain it fight against second round inflation effects. Market implied policy rates already suggest that the BoE will be hiking rates for longer than either the Fed or the ECB. Today’s stronger wage data enhanced this view and led to renewed support for the pound.
Another aspect of the Mansion House speech related to the UK rolling back some of the EU’s Mifid II rules. Hunt is backing recommendations to loosen the provision of free financial market research. The move is specifically aimed at increasing the provision of information around small and mid-cap companies to align with the government’s aim to channel pension funds towards higher growth assets.
