Markets
Oil prices yesterday peaked at north of $80 in the wake of renewed attacks between the US and Iran. The recovery from +/- $70 levels seen earlier this month isn’t markets betting on full-blown out-of-control war. But at the very least it serves as a reminder that geopolitical risks are far from gone. As things currently stand, the ceasefire is de facto dead. It prompted a hefty repositioning on European bond markets. In terms of the ECB scenarios, markets had perhaps banked too much on the benign one. Along with oil, gas prices have shifted from this milder scenario to the baseline which has two to three rate hikes embedded. German front-end yields rallied 12.4 bps and are nearing the 2026 highs again. Longer maturities added 6.6 bps (30-yr) to 10 bps (10-yr, two-month high). Revived inflationary spirits come at a time when public finances are potentially becoming a hot topic again with euro area member states beginning preparations for next year’s budget. UK gilts underperformed. Yields pushed 10.2-15.5 bps higher in a bear flattening move. The 10-yr here is closing in on the 5% mark. US yields built on Tuesday’s gains with a 1.7-4.4 bps increase. Short-term rates, e.g. the 2-yr, are testing the recent 1.5 year highs. FOMC meeting minutes of Warsh’s first policy meeting in June revealed that a “few” officials saw a case for a June hike already before eventually backing the on-hold decision. The general view was that upside risks to price stability remained elevated while the downside ones for employment had “moderated a bit”. It resulted ultimately in a hawkish tilt in the central bank’s official stance. Dollar currency pairs yesterday saw little movement. Sterling on the other hand extended its recent bull run to EUR/GBP 0.8527. GBP outperformance started with the technical break below EUR/GBP 0.86 and, together with a political stability premium and beneficial interest rate differentials, clearly more than offsets the fragile risk environment (European stocks down 1.8% yesterday).
In absence of an inspiring economic calendar, it’s the geopolitical narrative that sets the tone for trading once again. Oil prices aren’t rising any further so far, despite a second day of attacks shortly after yesterday’s US closing hours. That’s keeping a lid on US yields and is setting the stage for a lower open of German ones too. President Trump has a habit to escalate and then de-escalate but we’d be cautious in assuming a quick return to business as usual, particularly in oil prices and core bonds.
News & Views
Chinese headline CPI at -0.3% m/m and 1% y/y (from -0.1% m/m and 1.2% y/y) in May showed some further easing of end-demand price pressures. Consumer goods prices inflation slowed from 1.6% to 1.1%. Services price inflation held at modest 0.8% y/y. Food prices still held in negative territory (-1.6% y/y from -1.7%) while non-food prices slowed from 1.9% to 1.5%. Core CPI (ex food & energy) also moderated to 1% from 1.1%. The overall picture of consumer price data at least suggests that there still is no meaningful demand-driven push in domestic prices. June producer prices, which were also published this morning, in this respect painted somewhat of a more nuanced picture. The headline PPI figure ‘accelerated’ from 3.9% Y/Y to 4.1%. However, considering a 0.3% m/m decline, this rise to an important part is due to a strong base effect from last year. In a yearly perspective, prices rise for mining (16.5%), raw materials (8.6%) and manufacturing (3%) rose substantially. Producer prices for consumer goods (-0.9% y/y) declined. It suggests a cost-driven push in producer price inflation, but not all of this probably can be passed on to consumers. The central bank probably will keep an ease policy stance as domestic consumer demand remains modest. USD/CNY this morning eased marginally to 6.796 after a (USD driven) modest rise of late.
In an appearance before parliament, Bank of Korea (BoK) Governor Shin Hyun Song warned that policy rate will have to be raised at an appropriate time. The comments come one week ahead of the July 16 BoK policy decision. The BoK governor in this respect argued that a tighter policy is needed as inflation remains above target in a context of improving economic growth and at the same time rising risks of financial stability. The BoK has its policy rate at 2.5% since cutting it to that level end May 2025. June CPI inflation in Korea last week was reported at 0.1% m/m and 3.2% y/y. Even as the won recently regained some ground (currently USD/KRW 1504.25, compared to levels near 1560 in June/early this month) the weak level of the currency still includes an inflationary risk.
