Sunset Market Commentary

Markets

With the upcoming Fed meeting looming – one which should see rates reduced for the first time since December – it would take something material to lure investors from the sidelines back into the market arena. US retail sales tried by coming in better than expected across the board. Headline sales rose 0.6% on a non-inflation adjusted monthly basis while the control group (used in GDP calculations) added 0.7%. Last month’s figures saw a slight upward adjustment as well. But the NY Fed’s services business activity indicator unexpectedly slumped to one of the weakest levels in recent years (-19.4 from 11.7) with weak details, including for the forward-looking gauge. It basically confirmed the message coming from the manufacturing series published yesterday. The mixed bag of data left no permanent marks on rates. The latter eventually turned south in early US dealings with changes varying between -2.7 (2-yr) and -0.2 bps (30-yr). German Bunds underperform, driven by the long end of the curve. The 30-yr rises 2.6 bps. The French spread overtook the Italian one yesterday and that remains the case today. It’s a symbolically important sign of the times. A nervous dollar loses some ground against G10 peers. The greenback on a trade-weighted basis hits a two-month low in the 97 area. EUR/USD rose to fall just short of the July high at 1.1829. The pair is currently trading around 1.1822 and seems eager for a leap higher. A nod from Fed chair Powell could be needed for a sustained break though. The 2-yr tenor hovers near important support at the 2024/2025 lows. In other Fed-related news, the US White House said it’ll appeal Monday’s court decision that affirmed Fed’s Cook can continue do her job with her lawsuit challenging Trump’s move to fire her pending. It seems that, at least for the September meeting, Cook will be able to cast her vote as member of the Board nonetheless. The UK labour market report came in largely as expected. Sterling shrugged and EUR/GBP followed EUR/USD higher. UK assets, including gilts, are now eying tomorrow’s CPI release and Thursday’s BoE annual decision on QT. It is near certain that the £100bn of the last three years will be reduced since it would mean topping up the £50bn passive rundown by the same amount. That could pressure an already jittery gilt market.

News & Views

The Hungarian Statistical office today published Full time employers’ average earnings data. Average gross earnings in July grew by 9.0% Y/Y down from 9.7% in June (-1.5% M/M). Private sector wages declined 1.7% M/M bringing the Y/Y measure to 8.7% from 9.7%. After a strong 3.7% M/M gain in June, public sector wages declined a modest 0.5% M/M still raising the Y/Y measure from 9.5% to 10%. Net earnings increased by 9.4% and real earnings were 4.9% higher compared to the same month last year. The overall outcome of the report was slightly softer than expected. Even so, it doesn’t profoundly change the outlook for MNB policy in the short term as wage growth is still expected to remain elevated. The MNB in its latest inflation report (June 2025) expected whole economy gross wage growth of 9.2% this year, accelerating back to 10.5% next year. Short-term HUF rates held stable today (2-y swap 6.15%). Money markets hardly see any chance the MNB already being able to further reduce the policy rate (6.5%) this year. The forint in the meantime is testing the strongest levels in more than a year (EUR/HUF 390 area).

Canadian CPI declined 0.1% M/M (NSA) raising the Y/Y measure from 1.7% to 1.9%, falling below consensus expectations (2.0% Y/Y). Gasoline prices falling to a lesser extent year over year in August (+1.4% M/M; -12.7% Y/Y) than in July (-16.1%) were an important driver behind the faster growth in headline inflation. Excluding gasoline, the CPI rose 2.4% in August, after increasing 2.5% in each of the previous three months. Moderating the acceleration in the all-items CPI were lower prices for travel tours and fresh fruit compared with July, statistics Cananda comments. Shelter prices rose a modest 0.1% M/M and 2.6% Y/Y (from 3.0%). Core inflation (trim measure) eased slightly to 3.0% from 3.1%. Even as core inflation still holds above the 2% target, softer activity data, including poor labour market data for July and August, are expected to push the Bank of Canada to restart its easing cycle and cut the policy rate tomorrow from 2.75% to 2.5%. The loonie gains modestly today against a broadly weaker US dollar (USD/CAD 1.375).