Markets
US eco data grabbed a lot of attention last week with CPI & PPI inflation and retail sales suggesting that time remains on the Fed’s side for now. The market implied probability of a September rate hike halved from around 50% to 25%. Several attempts from US Treasuries to rally were blocked and eventually morphed into a sell-off last Friday. Splitting hairs over the Fed’s next move took attention away from where the action really unfolded: the (very) long end of global bond curves. Highest auction yields since respectively 2007 and 2001 for the US Treasury’s 10-yr Note and 30-yr Bond sales are testament to the markets’ real concerns: deteriorating public finances. Rating agency Fitch last week forecasted general government deficits of 7.4% of GDP in both 2026 and 2027 with government debt projected to rise from 117% of GDP last year towards 128% by 2030. Daily changes on the US curve ranged between +2.8 bps (2-yr) and +5.2 bps (20-yr) last Friday. The US 30-yr yield tested the recent high at 5.28% which is the highest level since July 2007. Higher real yields rather than higher inflation expectations are the driving force. Similar dynamics are at play in Europe, the UK and Japan. The German yield curve bear steepened with yields rising by 3 bps (2-yr) to 8.7 bps (30-yr). The 30-yr yield closed at its highest level since April 2011 (3.73%), the 10-yr yield tested the similar technical reference (3.2%). The Japanese 10-yr yield this morning reached its highest level since 1996. On FX markets, the dollar for a long time shrugged off weak and tame US eco releases. EUR/USD 1.16 resistance remained out of reach for most of last week up until last Friday. The greenback started underperforming global peers, pushing EUR/USD from 1.1528 to 1.1570. The US currency remains in the defensive this morning, eying an attempt at 1.16.
Today’s eco calendar only contains the August Empire Manufacturing Survey and a speech by ECB chief economist Lane. We don’t expect them to influence trading. Main US eco figures were released already last week and EMU money markets fully discount a September ECB rate hike. The bear steepening theme on core bond markets is the one to watch out for. The stalemate between the US and Iran remains a wildcard. Brent crude holds near the $90/b area with the European reference contract (Dutch TTF) holding close to highest levels since March (€62/MWh).
News & Views
Japan’s economy grew 0.3% q/q (1.1% annualized) in Q2 of this year, decelerating from Q1’s 0.5% and missing the consensus estimate (0.5%). Domestic demand was weak with private consumption flat for the quarter and business spending down by 1.2%. With imports contracting by 1.5% and exports rising 0.5%, net exports accounted for virtually all of Q2’s growth. The disappointing GDP numbers have little impact on money market expectations for a rate hike come September. The implied probability stands at 77% compared to 80% on Friday. The Japanese yield curve bear steepens with changes varying between 2.4 and 4.8 bps in what is a catch-up move with the US end last week. USD/JPY shows marginal changes around the 159 big figure.
Credit rating agency Fitch affirmed the UK’s AA- with a stable outlook last Friday. It said the new prime minister Burnham’s more commanding position (than his predecessor) within the Labour party and higher public approval should support greater political stability. Fitch doesn’t anticipate a significant near-term change to fiscal rules or macro policy, largely due to financial market constraints. It forecasts a narrowing deficit from 5.2% in 2025 to 4.2% in 2028, well above the AA median and the UK government’s own target. Debt would rise to 106% of GDP by end-2028, from 102.4% at end-2025. The agency downgraded growth forecasts to 0.9% this year and 1.2% in 2027 due to the drag from high energy prices, tighter funding conditions and further labour market weakness. In 2028 growth should rise to just above the 1.4% trend. Inflation is seen quickening from 2.6% in June to 3.7% at year-end before falling to the 2% Bank of England target by end-2028. Fitch does not foresee any changes in monetary policy through 2026 with rate cuts starting from next year to 3% in 2028.
 in Q2 of this year, decelerating from Q1's 0.5% and missing the consensus estimate (0.5%). Domestic demand was weak with private consumption flat for the quarter and business spending down by 1.2%. With imports contracting by 1.5% and exports rising 0.5%, net exports accounted for virtually all of Q2's growth. The disappointing GDP numbers have little impact on money market expectations for a rate hike come September. The implied probability stands at 77% compared to 80% on Friday. The Japanese yield curve bear steepens with changes varying between 2.4 and 4.8 bps in what is a catch-up move with the US end last week. USD/JPY shows marginal changes around the 159 big figure.){kind=link}