Markets
European bonds extended declines in the wake of yesterday’s ECB policy meeting. President Lagarde sounded pretty optimistic on the economy, saying it perhaps withstood the trade uncertainty better than expected. The comment took markets a bit by surprise since they were discounting another rate cut somewhere later this year. That base case is now seriously put into question, especially against the backdrop of a (rumoured) potential trade deal between the US and EU in the very near future. The classic “Bloomberg sources” at the ECB later hit the wires, saying that those at the Governing Council calling for further cuts face an uphill battle, reinforcing the move. Yields shot up, especially at the front end of the curve. That upward momentum rolled over in today, be it in a bear steepener this time around. Net daily changes vary between +1 and +3.2 bps in Germany, with a slight underperformance vs swap as well as other core areas. US yields eke out around 0-2 bps while UK rates add up to 2.5 bps at the front. The latter is a bit surprising after the recent string of disappointing data that began with yesterday’s PMIs and moved to this morning’s poor UK GfK consumer confidence and lower-than-expected rebound in June retail sales. Similarly striking is the muted response of front-end Japanese yields to news agency Bloomberg citing officials at the Bank of Japan who see a growing case for a rate hike by year-end after the trade deal reduced uncertainty. Markets give it an unchanged probability of around 80%. Both JPY and GBP are today’s underperformers on the FX market. USD/JPY bounces to 147.88, helped higher by a touch of dollar strength as well. EUR/GBP pierces through 0.87 and prepares for an attack of the post-Liberation Day high which more or less coincides with the 50% recovery on the 2022-2024 decline (resp. 0.8738 and 0.8744). GBP/USD, helped with the aforementioned USD strength, is headed for a back-to-back loss, declining to the 1.343 area. EUR/USD (1.172) loses some ground but remains near the multi-year July high.
The all-in-all muted market moves today shouldn’t surprise given the loaded eco and event calendar for next week. It may even start already this weekend with a possible trade agreement between the EU and US. If not this weekend, then probably early next week since Trump’s renewed tariff deadline lapses on Friday, August 1. In the run-up to that, we have US-Sino trade talks starting on Monday, European inflation prints as well as US and Eurozone Q2 GDP numbers. Friday’s US labour market report will as usual be closely watched for any potential clues regarding Fed rate cuts. Last month’s good edition in any case ruled out such a move at next week’s policy meeting. Fed aside, the Bank of Canada and Bank of Japan also meet. All this happens against the backdrop of the most busiest earnings week.
News & Views
IFO sentiment among German companies has improved somewhat. The index rose to 88.6 in July, up from 88.4 in June. Companies were slightly more satisfied with current business (86.5 from 86.2). Expectations remained largely unchanged (90.7 from a downwardly revised 90.6). Ifo concludes that the upturn in the German economy remains sluggish. The manufacturing index went up (-11 from -13.9) as companies see their current situation as noticeably better. Expectations also brightened further, but incoming orders still lack momentum. Services’ sector business climate deteriorated (2.7 from 3.8). Current business activity was assessed less favorably, while expectations were also revised slightly downward. Trade (-20.2 from -19.2) also weakened due to more pessimistic expectations. The construction subindex rose again (-14.0 from -15.1) on both the current and expected situation.
The IMF today published its 2025 Article IV Consultation with the UK economy. The IMF expects 1.2% growth this year and sees activity improving to 1.4% next year as monetary easing, positive wealth effects, and an uptick in confidence bolster private consumption and offset the drag of trade tensions. Current rise in inflation is seen as temporary due to regulated price increases. Inflation is expected to drop to 2.3% next year. On fiscal policy, the IMF indicates that difficult decisions will likely be needed beyond the medium term to address new expenditure pressures and rebuild fiscal buffers. Short-term the IMF advices a strategy maintaining more headroom so that small changes in to outlook do not compromise assessments of rule compliance. In this respect a once in a year assessment of the self-imposed rules at the time of the autumn budget is preferred rather than twice yearly review.
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