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Sunset Market Commentary

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Uncertainty on the health/recovery of the Chinese economy and a higher oil price due to prologued production cuts from Saudi-Arabia and Russia cloud the global economic outlook and triggered a mild risk-off reaction on Asian markets. German June factory orders tumbled 11.7% M/M and at first sight only reinforced the view that the German/EMU economy was heading for even deeper trouble. However, it was mainly due to a big ticket (aerospace) order in June. Even so, European equities opened with losses of 0.5%+ and momentum remained fragile as trading continued. The Eurostoxx 50 currently loses about 0.65% .US indices opened about 0.25/0.3% lower. Oil stabilizes just below $90/b. This level risks reinforcing unwelcome stagflationary dynamics. ECB speakers gave some final guidance for next week’s policy meeting ahead of their black-out period. ECB’s Knot indicated that markets are underestimating the chances of a September rate hike. His Slovak colleague Kazimir said that it’s preferable for the ECB to raise the policy rate next week rather than taking a pause. Contrary to what happened yesterday, the German yield curve (re-)inverts slightly with the 2-yr yield rising 4 bps while the 30-yr eases 1 bp. US yields traded with changes of less than 1.5 bp across the curve ahead of the services ISM. It printed strong (54.5 from 52.7 vs 52.5 expected) with the 2-yr yield aiming at 5% again. The Fed later today also will publish the Beige Book preparing the September 20 policy decision.

The dollar took a breather ahead of the ISM. Afterwards, the greenback profited from the interest rate support with DXY easily holding above the 104.7 May top. The ongoing debate on a ECB rate hike next week initially helped to prevent aggressive further euro sales, but the dollar took the upper hand with the pair testing the 1.07 big figure. USD/JPY trades at 147.60, near the 10-month peak touched in overnight rating. Japanese Vice finance minister for foreign affairs warned that authorities are ready to take appropriate action. The verbal interventions are no game-changer to counter USD dominance. UK yields are mostly trading marginally lower as BoE’s Bailey and his colleagues are testifying before a committee of Parliament. First headlines indicate that BoE’s Bailey is confident that the disinflation process will continue. Sterling underperforms with EUR/GBP returning to the mid 0.85 area.

News & Views

In the most remarkable of U-turns, Turkish president Erdogan today said that tight monetary policy was needed to slow inflation. Since he silently sided with a hawkish turn at the central bank, it raised its policy rate from 8.5% to 25% over the space of three months. Over the past years, his stubborn view that lower rates are needed for low inflation pushed the country’s assets to edge. Today, he vowed a return to single digit price increases as his government presented economic targets for the next three years. New inflation forecasts suggest that this will happen in 2026 (8.5%) following 65% this year (up from 24.9%), 33% next year (from 13.8%) and 15.2% in 2025 (from 9.9%). Growth forecasts for this and next year stand at 4.4% and 4% respectively, down from 5% and 5.5%. The Turkish lira didn’t respond to today’s update an continues trading weak at EUR/TRY 28.80.

The National Bank of Poland cut its policy rate today by 75 bps from 6.75% to 6%. It was always going to be a close call as Polish central bank governor Glapinski tied the faith of a rate cut to Polish inflation dropping to single digits; a target narrowly missed last week (10.1% Y/Y). The statement will later today provide more clarity, but a significant loss of economic momentum is likely the official explanation with October elections being the unofficial one. While the market was split on whether or not the NBP would pull the trigger, no one was positioned for such a large move with Glapinski at the July press conference indicating a preference to move in smaller steps once the cutting cycle starts. Polish zloty swap rates tank up to 22.5 bps at the front end of the curve (2-yr) with the zloty selling off. EUR/PLN breaks through 4.50 resistance to currently change hands above 4.55%. Interestingly, other CEE currencies took a scare as well from the NBP signaling (?) function. EUR/HUF spikes above 390 with EUR/CZK testing the YTD highs around 24.30. We must add comments by CNB Prochazka earlier today who said that he couldn’t image the CNB lowering rates while the ECB would still be going up.

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