Sunset Market Commentary

Markets

The June PMIs come with an important disclaimer this time around: “Most of the responses used in the calculation of the June flash PMI data were received prior to the signing of the memorandum of understanding for a cessation of hostilities between the US and Iran on June 17th.” A deal was reached at the start of last week, meaning some related optimism entered the closely watched business confidence indicators. But with the actual signing of the deal days later, it’s likely that the final reading (July 3) will get revised higher. For now, the euro area economy is contracting at a slower pace than in May with the headline index recovering from 48.5 to 49.5. The survey is indicative of unchanged GDP over Q2, the owner said. The services sector carried the improvement on signs that demand recovers after war-related disruptions. Activity slowed at a slower pace (48.9 from 47.7). Manufacturing production continued to rise modestly (51.2 from 51.3). New businesses fell again. A small increase in manufacturing failed to counter a further fall in services. June saw a renewed, but marginal increase in service staffing levels. Sustained job cuts in manufacturing, however, more than offset that. Manufacturers reported lengthening suppliers’ delivery times while purchasing activity was broadly unchanged. The latter meant the end of a three-month increase in anticipative buying. Inflationary pressures eased. Input costs rose rapidly, yet at the slowest pace since February across both sectors. Prices charged/output prices rose again. While less quickly than in May, they did not fully reflect the larger easing in factory gate prices. Optimism for the year ahead ticked higher from the 31-month low seen in June. While still low historically, the direction is encouraging. The PMIs printed close to consensus and leave little traces on markets. German bunds gradually grinded high, resulting in yield changes varying between -3.5 and -4.6 bps. It’s more a haven-thing though. A tech shake-out is weighing on stock markets with rotation into value and small caps continuing. The Nasdaq trades another 1.6% lower. The shaky risk environment turns out to be the biggest driver for FX too. It could remain a key factor for trading going into the close of 2026Q2 and 2026H1. The US dollar is the main beneficiary. EUR/USD is testing critical support at 1.1392. Breaking lower means a return to intermediate support in the 1.1214-1.1276 area (2024 and 2023 high respectively). Strong support lies at 1.1109/1.1111, where the 38.2% and the 50% pullback on the 2022-2026 and 2025-2026 rally merge. DXY breaks through 101.14 resistance (38.2% recovery on the 2025-2026 decline) to trade at 101.30. Next stops are 102.86 (50% recovery), followed by 104.59 (61.8%) and 104.68 (March 2025 correction high). Today’s market environment helps the yen to stop the haemorrhaging of the last couple of weeks. USD/JPY stabilizes just shy of multidecade highs around 161.5. Sterling continues to enjoy a politically inspired bid, shrugging off the largely weaker-than-expected UK PMIs. The composite indicator unexpectedly slipped marginally deeper into contraction territory (49.4). EUR/GBP trades at 0.8618, the weakest since mid-March. US PMIs improved from May to 52.2 (composite) with better readings across both sectors. They amount to an annualized 1% growth in Q2. The PMI owners strike a cautious tone, particularly when it comes to employment. Factory job cuts are running at the highest since 2009 if the pandemic is excluded. Input cost inflation is high but has eased from May while prices charged rose at the same pace seen last month.

News & Views

The Hungarian central bank (MNB) lowered its policy rate as generally expected by 25 bps, from 6.25% to 6%. The inflation path in the June forecast significantly shifted downwards compared to the March Inflation Report. The stronger forint, as well as the decline in energy and food prices has resulted in lower inflation. With the easing of the conflict in Iran, market fuel prices are declining below the level of fuel price caps. For the rest of this year and next year the rate of price increases will remain below the central bank’s 3% target. On annual average, inflation is expected to be 1.8% this year, 2.3% in 2027, and 3% in 2028. New GDP forecasts stand at 2%-3%-2.9% for the policy horizon. The baseline scenario is surrounded by balanced inflation and upside growth risks. The global risk environment has become more favourable, Hungarian risk premia remain tight and frozen EU funds will be unlocked. Looking ahead, if current positive developments persist, the MNB – while maintaining a positive real interest rate – sees room for further interest rate cuts throughout the summer, with a decision on their continuation to be made based on the September Inflation Report. The MNB meets both in July (21) and August (25) suggesting a 5.5% policy rate going into the September meeting. That’s faster than markets were anticipating. EUR/HUF extends today’s risk-off gains, moving from 352 to 355. The HUF swap rate curve bull steepens with yields up to 6 bps lower at the front end.