US Yield Curve Showed Some Gentle Bear Steepening

Markets

The US 30-yr yield was a whisker away from touching the psychological 5% mark yesterday as Friday’s tariff-driven sell-off in US Treasuries slowed. Still the US yield curve showed some gentle bear steepening with daily yield changes ranging between +1.4 bps (2-yr) and +2.8 bps (30-yr). The jury is still out with June US CPI inflation numbers up for release today. It’s the first of three “Summer” prints ahead of the September FOMC meeting which Fed Chair Powell referred to as key in determining the impact of US tariffs on price levels (higher or lower) and the Fed’s reaction function (cutting sooner rather than later). Consensus expects both headline and core CPI to accelerate to 0.3% M/M (2.6% Y/Y & 2.9% Y/Y respectively). Energy and food prices are expected to contribute positively, but attention will center on the pace of goods price inflation (clothing, furniture, toys, cars,…) as more and more firms hinted at passing through costs to consumers after initially shielding them by running down inventories or lowering margins. From a market point of view, anything in line or below market consensus will be seen as evidence of a subdued impact from tariffs, tipping the balance on the US money market further in the direction of a September Fed rate cut (currently 60% discounted). It can pull the US 2-yr yield back from 3.9% currently to this month’s low around 3.75% and halt the modest comeback of the dollar we’ve witnessed over the past couple of trading sessions. An upward beat can start moving the market needle to a first rate cut in December (currently almost two discounted) and push the front end of the curve back towards 4%, giving the dollar some additional backing. We expect the impact at the long end of the (US) yield curve to be bigger in the second (upside) scenario than in the first one given the lingering trade war and the structural deterioration in public finances stemming from Trump’s big beautiful bill. Both the Japanese 10-yr and 30-yr yield this morning tested the YtD high at respectively 1.6% and 3.2%.

Apart from US inflation numbers, we keep an eye at Bank of England governor Bailey’s Mansion House Speech tonight after market close. Previous BoE governors used that annual occasion in the past to announce a change of course. Bailey recently warned about signs of slack in the economy and a weakening labour market and tied that in a weekend interview with potential action by the BoE (switching to larger rate cuts). UK Gilts yesterday outperformed, especially at the front end of the curve, pulling sterling down. EUR/GBP is close to recording 0.87+ levels for only the second session since end 2023. The YtD top at 0.8738 and is a first target.

News & Views

The Chinese economy grew by 1.1% Q/Q and 5.2% Y/Y in the second quarter, from 1.2% Q/Q and 5.4% Y/Y in Q1 and slightly beating consensus estimates. YTD growth was reported at 5.3% compared to the same period last year. The monthly data published for June indicated better than expected production growth at 6.8% Y/Y (6.3% YTD) suggesting a still solid supply-side performance. At the same time, retail sales growth was weaker than expected at 4.8% Y/Y (5% YTD). Fixed asset investment slowed to 2.8%Y/Y from 3.8%. Property investment was 11.2% lower than in the same month last year. The external sector contributed positively to growth as exports rose 7.2% YTD, while imports declined 2.7%. The surveyed jobless rate remained unchanged at 5%. The data confirm the ongoing discrepancy between a solid/decent production & export-driven growth and lagging domestic demand in a context of deflation. In this respect new home prices declined by 0.27% M/M and 3.69% Y/Y. As trade tensions are likely to put pressure on exports going forward, the data support the case for further (targeted) stimulus of domestic demand. The yuan eases slightly this morning (USD/CNY 7.175).

The Czech Finance Minister yesterday gave a first assessment on the potential impact of the 30% tariff on EU imports by the US on Czech growth. Such a scenario might reduce this year’s growth by 0.4% from August and by 1.1 ppts in 2026, bringing growth at respectively 1.6% and 1.3%. Finance Minister Stanjura admitted that exports to the US only account for less than 3% of total exports, but the Czech economy will also be hit indirectly as its economy delivers components and other goods to EU trading partners.