ECB: June Accounts: Mixed Discussions On Euro

Sky News reports that "The UK will be forced to agree this month to increase defence spending to 3.5% of national income within a decade as part of a NATO push to rearm and keep the US on side." This comes just a day after PM Sir Keir Starmer's gov't outlined its Strategic Defence Review, which committed to an increase to 3% of GDP by 2034. 

• The 3.5% target in terms of hardline military spending (troops, ammunition, tanks, planes etc.) is likely to be joined by another amounting to 1.5% of GDP on military-related spending, such as critical infrastructure, anti-terrorism or cybersecurity. This has been pushed by NATO Secretary General Mark Rutte, backed by other members, and is likely to be adopted at the NATO summit at the end of the month as an official target by 2032. Sky News reports its source as saying the UK would target this by 2035.
• The gov't now sits in a vulnerable position on several fronts:
  • While the gov't presented the SDR as a 'root and branch' review of the UK's military capabilities, it will now be seen as already insufficient just a day after publication.
  • Those on the left of Starmer's party could voice concerns about further increases in military spending at a time when the gov't is looking to curtail welfare payments.
  • The potential adjustment risks the UK, historically seeing itself as the senior-most European nation in NATO, being viewed as lacking commitment to bolstering the continent's defence.
  • Markets, already focusing on Chancellor of the Exchequer Rachel Reeves' 11 June spending review announcement, could show a reaction to further unfunded pledges on defence spending without associated commitments to raising revenue or making savings elsewhere. 

• Date $MM Issuer (Priced *, Launch #)
• 06/03 $3B #AfDB: $2B WNG 3Y SOFR+33, $1B WNG 10Y SOFR+64
• 06/03 $2B #Prov. of Ontario: 10Y SOFR+95
• 06/03 $1.5B CPPIB 5Y SOFR+54
• 06/03 $1.25B #Kommuninvest +3Y SOFR+39
• 06/03 $500M IADB 2030 tap SOFR+40
• 06/03 $Benchmark Hong Kong 5Y Green +50
• 06/03 $Benchmark NAB 3Y +65a, 3Y SOFR, 5Y +75a

Bailey, Breeden, Dhingra and Mann have concluded their testimony to the Treasury Select Committee. Here are the key highlights:

• Breeden's view: We learned that Breeden would have voted for a 25bp cut in May irrespective of global factors and she didn't describe the decision as close. She also explicitly noted that the Minutes stated not all members who voted for a 25bp cut held this view. So she seems to have distanced her view a little from Lombardelli and Breeden and is tilted a little more to the dovish direction. She noted that nothing had changed to challenge the Agents' pay settlements expectations.
• A popular line amongst MPC members now is that the direction of the rate path is downwards but the timing and terminal point are very uncertain. We have seen this line in other recent MPC appearances, and expect it to continue making appearances going forward.
• There was no discussion of June and a cut then appears off the table. There was also no steer to either August or beyond, so knowing that Breeden is a bit more dovish is the key takeaway view here - particularly as she doesn't speak that much and so we can assume that unless something materially evolves in terms of pay settlements that she is likely to be at least as dovish if not more so than Governor Bailey.
• Rate projections: Governor Bailey said that using market paths in the rate projections made little sense and seemed to suggest that eventually market paths probably wouldn't be used at all but that there was quite a bit of work for the BOE staff to do before they could get to this point.
• On scenarios: All of the members agreed that the scenarios and model improvements had improved the MPC's discussions and that they enabled them to quantify effects and run different aspects through the model (Mann used an example of the steepness of the Phillips curve).
• Labour market data: Both Bailey and Breeden pointed to relying more on the HMRC data as well as other labour survey data given LFS issues.
• Surveys to get namechecked by Bailey: Agents and DMP surveys (both are BOE surveys), PMIs, CBI surveys, Lloyds Bank survey.