Sunset Market Commentary

Markets

Market activity shifted into a lower gear today after an impressive bond market rally since end last week fired impressive gains across multiple assets categories. Compared to the (intraday) peak levels end last week, the US 2-y and 10-y yield respectively dropped from 5.12% to 4.68% and from 4.09% to 3.78%. After a ‘hawkish tendency’ with investors selectively focusing on stronger than expected (even secondary) data, they all at once saw the glass again half empty. Mixed payrolls and slightly softer than expected US CPI rekindled hopes that the Fed would reconsider a pause or even an end to its hiking cycle after an ‘inevitable’ 25 bps step on July 26. Fed communication at least didn’t change and won’t change as Fed governors enter the ‘black-out’ period ahead of the upcoming policy meeting. German 2 & 10-y yields in the meantime declined from 3.35 % to 3.17% and from 2.68% to 2.48% as the ECB has more work to do in its anti-inflation campaign. US yields today regain between 5.5 bps (2-y) and 0.5 bps (30-y). The German 2-y yield adds 3 bps with the 30-y unchanged. Given the wild swings recorded earlier this week this basically no more than consolidation. Even so, equites still don’t budge. Equity investors see a decent chance for a soft landing with corporates maintaining a decent degree of price power. First US banking results released today were stronger than expected and didn’t provide much of a reason to reduce equity long exposure (EuroStoxx 50 +0.4% and testing the cycle top near 4420). The S&P 500 opens 0.25% higher, recording a gain of about 2.25% over the previous 5 days. The dollar got hammered across the board. DXY tumbled more than 3.5% from a peak near 103.5 on Thursday last week to currently changing hands just below the 100 barrier. EUR/USD (1.122) in the reference period jumped slightly less than 4 big figures, easily clearing the YTD top of 1.1095. It probably needs quite a set of stronger than expected US data to put a solid floor for the US currency. Today being the exception, the yen was one of the major beneficiaries of the USD sell-off. USD/JPY dropped from the high 144 area late last week to fill bids below 137.5 in Asia this morning (currently 138.75). Aside from the overall USD-correction markets ponder the chance for the BOJ tweaking its YCC, maybe already at the end of July meeting. In a broader perspective, the weaker dollar was a blessing for most smaller currencies (SEK, NOK, CHF, CAD, AUD, NZD). In central Europe, the forint profited most (EUR/HUF 374). The zloty (EUR/PLN 4.445) consolidates but is still within reach of the cycle top near EUR/PLN 4.41. It might sound a bit contradictory, but easing inflation fears at the same time triggered some kind of ‘reflationary’ rebound in cyclical commodities, including oil, but also the likes of copper.

News & Views

Swedish June inflation again surprised on the upside. Headline CPI (using a fixed mortgage rate) rose 0.9% m/m to be up 6.4% y/y. While easing from May, it was more than the 6% expected. A core gauge filtering for energy came in at 0.6% m/m and 8.1%, topping a 0.5% and 7.9% estimate. Both measures also surpassed the Riksbank’s June forecasts, keeping high pressure on the bank to tighten further, especially with the krone still at historically weak levels. At the June meeting it said it will increase rates “at least one more time this year” from 3.75% to 4%. The Riksbank at the same time is walking a tightrope with a higher rated impacting the country’s vulnerable property sector and potentially triggering knock-on effects to the broader economy. This helps explain the SEK’s dreadful performance over the past few months. Case in point: the SEK today loses out against the euro even as Swedish yields rise more than 4 bps vs minor losses in Germany/Europe. EUR/SEK trades 11.51, up from 11.44 at the open.

The Eurozone’s non-seasonally adjusted trade balance almost turned green in May, Eurostat data showed. The deficit narrowed to -0.3bn, significantly less than the €-11.7bn in April and vastly better than the €-30.3bn in May last year. The ongoing improvement came on the account of increased exports of chemicals and machinery while the value of imported energy products, especially from Russia, declined. Total exports in May stood at €241.9bn vs €242.2bn in imports. For the running year, euro area exports to the rest of the world rose to €1181.9bn in January-May (+3.7% compared to the same period in 2022), while imports fell to €1199.5bn (-5.1%). This led to a running deficit of €-17.6bn compared to the €-124.7bn in Jan-May 2022.