Sunrise Market Commentary

Markets

Wall Street returned well rested from the long weekend. The tech-heavy Nasdaq rose more than a percent while the Dow Jones overcame initial weakness to close with another record high. Choppy trading in Treasury yields ended with net daily changes varying between 0.1 bps (30-yr) to −3.1 bps (3-yr). The July services ISM printed at a solid 54 vs June’s 54.5. Details suggest growth momentum to carry on next month with new orders coming in at 55.1. Employment printed its first 50+ reading since February. The prices paid gauge eased from a post-war high of 71.3 to 67.7. Fed’s Waller in a panel discussion with amongst others ECB’s Schnabel noted that risks have completely flipped around, i.e. from the labour market to inflation. “That changes how you might want to think about policy.” US money markets price in a full rate hike by end of this year. ECB governor Schnabel warned that despite the oil price decline, we’re not back at the pre-war situation. “Markets continue to point to higher oil prices over longer horizons. Gas prices are still around 40% higher than before the war.” Schnabel warned of still-elevated pipeline and supply-chain pressures while adding that energy and inventories will need to be refilled. Others, including Belgium’s Wunsch sounded more relaxed. He’s not excluding another rate hike but with second-round effects not in evidence so far and wage developments quite benign, policy tightening would not have to be significant. German yields finished the day between 0.9 (2-yr) and 2.5 bps (30-yr) higher. We hold to the view that further bear steepening is in store. Oil prices are reluctant to really drop below the pre-war levels, limiting how much further inflation expectations and risk premia can compress. In addition we pick up signs of public finances returning to the fore with next year’s budgets being prepared. Belgium serves as a case in point. The Monitoring Committee said it needs to find another €7.7bn by 2029 to meet the EC’s public expenditure norm. This rises further to €9.8bn by 2031. France’s finance minister last week said he’s aiming for a 5% deficit next year. A huge gap that already seems ambitious given presidential elections in April. Germany meanwhile will see 4% budget deficits through 2030. Japan sees a further rise in longer-term bond yields with the 10-yr and 20-yr hitting another multi-decade high after doing the same just yesterday. The 30-yr yield dropped 7 bps this morning after a solid auction before paring virtually all losses. This week’s beginning-of-the-month US refinancing operations deserve some attention. It starts off with a $58bn 3-yr sale today with a 10-yr and 30-yr one following later this week. Currency markets were stoic yesterday. Listless trading is keeping EUR/USD locked in a tight trading range around 1.14 and DXY around 101. Sterling steamrolls ahead with EUR/GBP now breaking through 0.855. 0.8544 serves as intermediate GBP resistance on the way to the 0.85 big figure.

News & Views

The Japanese Ministry of Health, Labour and Welfare today reported wage data for the month of May. Labour cash earnings rose 3.2% y/y, an easing from the 3.6% y/y rise recorded in April and also slightly below expectations. Base pay (ex-bonuses and overtime payments) also rose 3%. Real cash earnings eased to 1.4% compared to April (2% y/y), vs 1.7% expected, the fifth consecutive positive real growth rate. Last week the Rengo union said it negotiated average wage increases of 5.01% for its members. A continuation of virtuous wage growth is a key factor for the Bank of Japan in its process of normalizing monetary policy. Even so, the BoJ is cautious in further policy tightening while the government prefers a stimulative (fiscal and monetary) policy. At its June meeting, the BoJ raised its policy rate by 25 bps to 1%. Markets discount an 85% probability of a next hike by end-2026.

In the Bank of Canada’s Q2 survey, overall business sentiment has deteriorated after improving over the past three quarters. Sales outlooks softened slightly as higher (fuel-related) costs bite into spending. Export outlooks improved, amongst others on strong commodity demand. Most firms did not report binding capacity constraints or labour shortages. The signing of the interim agreement between the United States and Iran has lowered the previously elevated inflation expectations of firms. On the consumer side, a slightly larger share of consumers than in the previous quarter expect inflation to be above 3% over the next 12 months. Two- and five-year-ahead inflation expectations edged up on tariffs and energy prices. Consumers’ perceptions of the labour market improved modestly from the low levels in the previous quarter. The survey is final input for the Bank of Canada next week. The BoC is expected to keep the policy rate at 2.25%. An end-of-year hike is discounted at 50%.