Markets
During the previous weeks, interest rate markets were forced into some sharp U-turns as the outlook/expectations on energy supply (and supply of other commodities) still proved highly uncertain/unpredictable even after the US and Iran signed a Memorandum of Understanding (MoU) last month. Even as several key issues still had to be solved, markets (and multiple central bankers) were inclined to believe that the worst of energy supply shock was over. The Brent oil price dropped to $70 p/b and money markets two weeks ago moved to a scenario where one additional interest rate hike in EMU and probably also in the US should suffice to cover inflationary risks. However, a flaring up of the military confrontation between the US and Iran over the control of the passage through the Strait of Hormuz, over the previous week showed that it is too early to position for a benign outcome on supply disruptions related to Hormuz. EMU and US short-term yields jump to or even beyond the highest levels since the start of the conflict. Markets again embraced a scenario where rates mostly likely had to be raised and had to stay at a higher level for longer. An unexpectedly mild US June CPI release published yesterday again triggered some hefty swings at the short-end of the (US) curve. US ST yields eased as a Fed rate hike at the July meeting probably isn’t necessary. Even so, Fed Chair Warsh in his semi-annual appearance before the House indicated that there is plenty of work to do as the Fed has no tolerance for persistently elevated inflation. The June inflation release bought the Fed time, but the debate on the need for potential further tightening continues, especially as long as the passage through Hormuz remains as ‘complicated’ as it currently is. Even after yesterday’s correction, both US and EMU markets still tend to discount some kind of higher for longer scenario with two additional ECB rate hikes discounted by H1 2027. In the US, 60% for a similar move is priced. EMU short-term yields (2-y swap 2.95%, Bund 2-y 2.75%) are only a whisker away from the post-war peak levels. At 4.22%, the picture for the US 2-y yield basically isn’t much different. For yields at the long end of the curve, the downside also looks well protected with the US 30-y easily holding north of the 5% and the 10-y near 4.6%. German LT yields (30-y 3.65% and 10-y 3.14%) even are not that far away from multi-year peak levels with higher real yields/(fiscal?) risk premia probably playing at the background. This summer, especially at the short-end of the curve more erratic, event driven swings might still occur as headlines from the Middle East are at risk of staying highly inconclusive, if not contradictory. In a daily perspective, today was a ‘mini-copy’ of yesterday’s price action related to the US CPI. US and EMU yields gained a few bps in the run-up to the June US PPI release. At -0.3 M/M and 5.5% Y/Y the final demand headline PPI measure also printed materially softer than expected. The core (ex-ex food and energy) at 0.2% M/M and 4.7% Y/Y also was on the lower side of expectations. After initially rising a few bps, the US 2-y yield currently again cedes 3 bps. The 30-y drops 1 bp. EMU/German yields still mostly trade marginally higher (1-2 bps across the curve). Brent oil ($85 p/b) trades marginally lower in a daily perspective even as US President Trump launched and indicated more military action against Iran. Still more directionless trading in the major FX cross rates with the dollar losing marginally (DXY 110.8; EUR/USD at 1.143).
News & Views
Final Polish inflation numbers confirmed the initial outcome for June: -0.5% M/M and 2.5% Y/Y (from 3.1% in May). Price pressure is expected to pick up in July and August though as the recent fuel tax normalization comes into effect. Since mid-June, the standard excise duty on fuels has been reinstated, while from July the authorities have moved to restore the standard 23% VAT rate and removed administratively imposed fuel price caps. This expected inflation pick-up contrasts with NBP governor Glapinski’s suggestion end last week to file a motion for a 25 bps rate cut after the summer break. It’s clear that not everybody inside the MPC stands by that idea. NBP Kotecki said that it is too early to declare support for or opposition to a possible proposal to cut rates. He does consider the rate hike discussion over. That’s unlike his colleague Zarzecki who yesterday said that a rate hike is more likely than a rate cut as the NBP’s next move (in Q1 2027). The Polish zloty hit its weakest level against the euro (4.35) since November 2024 on Glapinski’s comments. The pair consolidates since then, currently changing hands around 4.33. Polish money markets see stable policy rates as the most likely outcome for the next 12 months.
 still proved highly uncertain/unpredictable even after the US and Iran signed a Memorandum of Understanding (MoU) last month. Even as several key issues still had to be solved, markets (and multiple central bankers) were inclined to believe that the worst of energy supply shock was over.){kind=link}