2026-08-13 Thursday

The Climate Prediction Center issued an El Niño Advisory on August 13, 2026, with a greater than 90% chance of a very strong event during the Northern Hemisphere fall and winter 2026-27. Sea surface temperature anomalies exceeded +2.0°C in the eastern equatorial Pacific, with July Niño index values of +1.4°C in Niño-3.4, +1.7°C in Niño-3, and +2.9°C in Niño-1+2. The CPC also notes a 69% chance of a historic event exceeding the strength of previous El Niño events since 1950 during October-December 2026.

The Central Bank of the Dominican Republic reported annual inflation of 5.47% in July 2026, above the target range of 4.0% ± 1.0%, with core inflation at 4.96%. The monetary policy rate was set at 5.25% in August, and gross international reserves reached $15,253.0 million, while the current account deficit improved to -1.2% of GDP in 2025. Cumulative inflation stood at 2.21% and monthly inflation at 0.19%.

A Federal Reserve FEDS Note analyzes the private credit (PC) and leveraged loan (LL) markets, each about $1.4 trillion as of end-2025, together accounting for roughly 45% of lending to private nonfinancial corporations. PC borrowers are smaller (median revenue $223 million vs. $902 million) and more leveraged (5.0x debt/EBITDA vs. 3.2x), with PC loans typically smaller ($20 million vs. $275 million). The note finds that larger firms can substitute between markets, while smaller firms are more dependent on private credit.

German federal securities yields have risen significantly over the past year, with the overall yield reaching 3.12% in July 2026, up from 2.56% a year earlier. On August 11, 2026, the 10-year yield stood at 3.20% and the 30-year at 3.69%. Yields varied by maturity, with the 5-year federal obligations at 2.90%, 10-year federal bonds at 3.16%, and 30-year federal bonds at 3.65% as of July 31.

The euro area economy has shown resilience to the energy shock from the Middle East conflict, with inflation falling to 2.8% in June and activity returning to pre-conflict levels. The ECB kept rates unchanged at 2.25% in July, and US tariffs are seen as a headwind rather than a major storm. This resilience reduces the urgency for further ECB rate hikes, which would otherwise pressure bond yields. The story is under the radar because it is a macro update that lacks a dramatic catalyst, but a clear signal would be if inflation deviates from the 2.8% reading or if the ECB signals a shift in its stance.

A Bank of England study finds that negative earnings news from the 'Magnificent 7' US tech firms transmits globally, causing equity indices to fall, credit spreads to widen, and the US dollar to depreciate, with muted Treasury yield responses, suggesting limited flight-to-safety dynamics. Using daily shocks around earnings announcements from 2000 to 2025, a -1% Mag-7 equity price shock leads to a nearly 2% decline in the S&P 500 and a 1% fall in the FTSE 100 within two days, while US and UK 10-year yields initially fall a few basis points but later rebound.

The German federal government rejected UniCredit's offer to exchange shares in Commerzbank, citing lack of an appropriate premium and supporting Commerzbank's independence. This decision affects the future of Commerzbank and the German banking sector. The rejection removes a potential catalyst for banking consolidation in Europe, which could have improved efficiency and profitability. It also signals that the German government prioritizes national control over foreign ownership, which may deter cross-border M&A in the sector. This is under the radar because it is a specific corporate action, but a signal to watch is whether UniCredit returns with a higher bid or whether other foreign banks attempt similar moves.

The CSSF reported that total net assets of Luxembourg UCIs, SIFs, and SICARs reached EUR 6,731.325 billion as of June 30, 2026, up from EUR 6,634.393 billion in May. It also highlighted recent publications on CRD VI transposition and ESMA's Common Supervisory Action on risk management for UCITS and AIFMs. The growth in fund assets indicates continued investor appetite for Luxembourg-domiciled funds, which supports the country's financial sector and its contribution to public finances. This is under the radar because it is a routine monthly update, but a signal to watch is if the growth rate accelerates or decelerates significantly, which could reflect broader market sentiment.

A Dallas Fed working paper uses the 2026 Iran War as a natural experiment to show that the short-run U.S. oil supply elasticity is effectively zero, contradicting higher estimates. The war removed about 15% of global supply via the Strait of Hormuz closure, spiking WTI from $61 to $115, but U.S. shale output could not respond within a month. This implies that oil price shocks are more persistent and inflationary than previously thought, which could force central banks to tighten policy more aggressively, raising bond yields. The finding is under the radar because it is an academic paper, but a concrete signal would be if the Fed or other central banks cite this study in their policy deliberations.

A BIS report highlights that the Middle East conflict has raised energy and fertiliser prices, weakening growth and intensifying fiscal pressures in Africa, where public debt and debt service burdens remain high. Shifting to domestic currency debt has reduced exchange rate risk but increased debt service costs and rollover risks. The report notes that higher interest rates and shorter maturities have increased debt service costs and rollover risks.

The National Bank of Georgia reported that total international reserves exceeded 7.5 billion US dollars, reaching a historical maximum, and launched an analytical platform for economic data and an interactive inflation report. The IMF noted that reserve accumulation strengthened confidence in financial markets. Higher reserves reduce the risk of a balance-of-payments crisis, which supports the value of Georgian debt and lowers sovereign risk premiums. This is under the radar because Georgia is a small emerging market, but a signal to watch is whether the reserves continue to grow or if the IMF's endorsement leads to improved credit ratings.

UK and EU markets will move to a T+1 settlement cycle on 11 October 2027; the FCA warns that some firms are significantly behind and may face regulatory action, while ESMA urges finalisation of preparations. The SEC is simultaneously implementing mandatory clearing for U.S. Treasury cash transactions by December 31, 2026, and repo transactions by June 30, 2027. The FCA has reformed UK equity market transparency with a framework for a future consolidated tape and cut transaction reporting costs by over £100 million annually by reducing reporting fields from 65 to 52. The FCA, Bank of England, and PRA introduced a new oversight regime for critical third parties providing technology and data services, and the FCA's Scale-up Unit admitted ClearScore, Modulr, Teya, Urban Jungle, and Zilch for tailored support. The regulator's 2025-30 strategy focuses on rebalancing risk to spur growth, investing in technology, and expanding globally.

The Eurosystem's 2024-25 monetary policy implementation combined gradual rate cuts with continued balance sheet normalisation: the deposit facility rate was lowered by 200 basis points in eight 25bp steps to 2%, while excess liquidity shrank from €3.4 trillion to €2.5 trillion. The March 2024 operational framework review kept the DFR as the steering rate, narrowed the MRO-DFR spread to 15 basis points, and made standard refinancing operations the marginal liquidity-providing tool. By end-2024, TLTRO III had been fully repaid and PEPP reinvestments had ended, leading combined APP and PEPP holdings to fall by €0.9 trillion to €3.7 trillion. The system thus operated a floor regime with abundant reserves and limited interbank reserve trading.

The report is a descriptive review of Eurosystem operational data, market data, and surveys such as the Bank Treasurer Survey. Average take-up of standard refinancing operations stood at €18.7 billion, with peaks above €35 billion by end-2025. It assumes annual reserve declines of roughly €470 billion and that banks representing half of total banking assets will reach their preferred reserve level by end-2026, but flags these projections as highly uncertain. It also notes that money market rates can be driven by collateral supply and non-bank cash demand, so rising rates do not automatically signal reserve scarcity. Climate-related collateral measures and the second-best rating aggregation rule are still being calibrated, with possible unintended effects on eligibility and haircuts.

The balance sheet run-off reduces the Eurosystem's demand for government bonds, increasing net supply to the private market, which puts upward pressure on sovereign yields and spreads. The narrower MRO-DFR spread and reliance on standard refinancing operations shift bank liquidity management toward the central bank's standing facilities, tightening the pass-through of policy rates to money market rates. Collateral framework changes alter the eligibility and cost of assets used in repurchase agreements, affecting bank funding conditions and ultimately the pricing of sovereign debt. These mechanisms link the operational framework directly to fiscal conditions and bond market valuations.

In July 2026, Russian monetary conditions indicators moved in different directions but remained generally tight. The Bank of Russia cut its key rate by 25 bp to 14.00% on July 24, while OFZ yields rose on average but long-term yields fell after the Finance Ministry suspended OFZ auctions, flattening the curve. The 10Y-2Y OFZ spread narrowed to 111 bp from 251 bp at end-June, as the 10Y yield fell to 15.69% (-69 bp) and the 2Y yield rose to 14.58% (+71 bp). The flat shape of the curve around 14.0–14.1% at all maturities is consistent with market expectations of limited changes in short-term rates over the horizon.

Despite the rate cut, money market rates rose: RUONIA averaged 14.31% in July, +30 bp vs June. Corporate borrowing costs also increased, with the IFX-Cbonds corporate bond yield averaging 15.89% (+72 bp) and long-term corporate loan rates rising to 12.9% in June (+1.3 pp). Meanwhile, inflation expectations of households jumped to 14.70% in July from 12.45% in June, and the 2026 inflation forecast was raised to 6.0-7.0% due to fuel price growth. The rouble weakened in July (USD/RUB +5.8% monthly average), partly due to worsening terms of trade.

The Bank of Russia noted that the rise in money market rates in mid-July was not due to liquidity shortage but to the strategy of some large banks, indicating potential volatility. The Finance Ministry suspended OFZ auctions on July 20, which became a key factor behind the decline in long-term yields. The suspension may be temporary, with resumption depending on market conditions. The structural liquidity deficit is forecast at 2.4-3.6 trillion rubles for December 2026, with banks' liquidity needs at 6.0-7.2 trillion rubles. The average key rate range for 2026 is 14.5-14.6%, for 2027 10.5-12.5%.

The rate cut and OFZ auction suspension lead to a flatter yield curve and lower long-term yields, because reduced primary OFZ supply and expectations of limited short-term rate changes compress term premia. This lowers fiscal borrowing costs for long-term debt but raises short-term funding costs, as money market rates remain elevated. The divergence between short and long rates signals market expectations of easing later, but sticky inflation expectations and rouble weakness may limit further cuts.

The EU's prohibition of monetary financing, enshrined in Article 123 TFEU, is a strict, unconditional ban that safeguards central bank independence and fiscal discipline, thereby supporting price stability. The paper argues that proposals to loosen or circumvent the ban, such as debt cancellation or helicopter money, would undermine these objectives and are incompatible with the Treaty. The ban, introduced in 1994, applies to all EU member states and is stricter than pre-EMU restrictions and those in the US and UK, which allow exceptions in exceptional circumstances.

The paper uses historical documents, EU legislation, ECB monitoring reports, and CJEU case law to illustrate the application of the prohibition. It highlights that in 1998, all first eleven euro area countries scored 1.0 on Romelli's index of restrictions on lending to government, up from scores as low as 0.25 in 1990. The ECB's asset purchase programmes (PSPP, PEPP) have issuer and issue limits of 33% for government bond purchases, and the ECB has never initiated infringement proceedings against an NCB before the CJEU. The paper acknowledges that central bank asset purchases can have favourable effects on government financing conditions, but argues these are not equivalent to monetary financing if safeguards are in place.

Counterpoints include Modern Monetary Theory (MMT) and proposals for temporary monetary financing in exceptional circumstances, but the paper dismisses these as incompatible with the Treaty. The paper notes that some former ECB officials have accused the ECB of de facto monetary financing through its asset purchases. The concrete market effect is that the prohibition ensures sovereign debt is subject to market discipline, which influences borrowing costs and fiscal sustainability. The ECB's interpretation and enforcement of the ban shape the boundaries of monetary policy, affecting bond yields and the transmission mechanism.