Sunset Market Commentary

Markets:

Markets took off this morning where they ended yesterday: by selling bonds. The move started as US traders returned from the 4^th of July Holiday and accelerated a first time after a technical break of the 10y yield above 3.85/3.87%. FOMC Minutes delivered a second blow by showing more disagreement than expected over the Fed’s skip strategy. Some favoured a 25 bps rate hike, but accepted the status quo. Minutes showed a lot of references to resilient inflation and resilient growth with the influential staff now reducing the odds of a recession later this year to 50/50. Most Fed governors are now in the camp of at least two more rate hikes this year, as Fed Chair Powell also confirmed at a conference at the end of last month. For the umpteenth time this cycle, markets are positioned very dovish confirmed to Fed talk. For the umpteenth time, they have to reposition higher. Interestingly, the long end of the curve is suffering as well with real yields driving the move. Markets come to terms with the (even) higher for (even) longer idea with the theoretical concept of neutral rate (equilibrium rate given price stability and full employment) being rethought. Instead of the long-assumed 2.5% for the US, it is likely going to be higher. Core bonds immediately found themselves on a slippery slope this morning with early US eco releases making it a triple whammy. The US ADP labour market report showed another astonishing amount of net job gains (+497k vs +225k expected) in June while US jobless claims more or less leveled (248k from 239k vs 245k expected) below the psychologic 250k barrier. US yields add 5 bps (30-yr) to 15 bps (2-yr) at the time of writing. The US 2-yr yield broke through 5%, setting a new cycle peak at 5.12% (highest since 2006). The next target stands at 5.26% which is the 2006 high. The US 10-yr yield pushed above 4%, eying the YTD high at 4.09%. UK Gilts and German Bunds joined the sell-off. UK yields rise by more than 10 bps across the curve. The UK 2-yr and 10-yr yields set new cycle highs at respectively 5.5% and 4.66%. German yields increase by 8.1 bps to 12.2 bps with the belly of the curve underperforming the wings. From a technical point of view, the German 10-yr yield finally leaves key resistance at 2.56% behind. The YTD/cycle high stands at 2.77%. Rising real rates are taking their toll on stock markets. Main European benchmarks lose more than 1.5%. In FX space, it’s again very quiet amongst majors. Sterling slightly outperforms both the euro and the dollar. Moves in cable (GBP/USD) and EUR/USD are technically insignificant, but EUR/GBP tested the 0.8518 YTD low. The Japanese yen is stuck between risk-off flows and rising core bond yields. The US non-manufacturing ISM and JOLTS job openings will still be released later today with official payrolls on offer tomorrow.

News & Views:

The UK June Decision Maker Panel survey (DMP) showed that realized output price inflation slowed from 7.6% in May to 6.9% in June. The DMP covers prices from firms across the whole economy, not just consumer-facing firms. The trend decline develops rather slowly (3-month moving average 7.3% from 7.6%). Over the next year, businesses expect output price inflation to ‘fall’ to 4.9%, down from 5.1% May. One-year ahead CPI inflation expectations decreased to 5.7% from 5.9%. However, expectations for three-year ahead CPI inflation increased slightly (by 0.2 ppts) to 3.7%. Current CPI perceptions of firms were close to the 8.7% actual CPI. Annual unit cost growth was unchanged at 9.4% while expected unit cost growth again accelerated from 6.4% to 6.9%. Expected wage growth was also slightly higher at 5.3%. 47% of firms reported that the overall level of uncertainty facing their business was high or very high. Both sales and price uncertainty increased slightly in the monthly series, although the three-month moving averages decreased for both series. Price uncertainty remains at relatively high levels.

The US trade deficit narrowed from $74.5bn to $69bn in May. The decline occurred as imports (0.8% M/M) dropped much faster than exports (-2.3% Y/Y), with the decline mainly driven by consumer goods and industrial supplies. The goods balance deficit improved from $96.2bn to $91,26bn. At the same time the US services balance improved slightly further from $21.58bn to $22,28bn. The petroleum balance eased slightly from $2.98bn to $2.34bn. The US petroleum balance already trades in positive territory since March last year.