Markets
Bear steepening is again name of the game today. Two events triggered the selling pressure in core bonds with the long end of the curves underperforming. First there’s the continuation of the Bank of Japan’s policy normalization. The US trade war interfered with the central bank’s semi-annual rate hikes, but with uncertainty reduced and underlying inflation still running above the 2% target, the BoJ picked up where it left things in January. At 0.75%, the policy rate reached its highest level since 1995 with governor Ueda readying more moves in 2026 (“some distance from lower end of neutral range”). The next step higher is discounted by the July policy meeting. Higher Japanese (bond) yields have global implications. By closing the gap with interest rate levels in other parts of the world, there’s an increasing risk of a JPY carry trade unwind with money flowing back into Japan(ese) assets. The Japanese yen is exception to the rule today with USD/JPY surging from 155.70 to 157.30. The Japanese 10-yr yield breached 2% to trade at its highest level since 1999, making JGB’s starting to look attractive after all those years. The Japanese 30-yr yield (3.42%) sits only 10 bps below the German one. Together with the post-Covid monetary framework, there’s the return of risk premia embedded in the long end of the curve as central bank’s unwind their QE-portfolios. Fiscal policy as the new dominant market force is one of our hallmarks together with the notion that Europe will become more reliant on joint debt issuance as a means to prevent a repeat of the 2010-2011 crisis. What started with temporary unemployment support (SURE) and recovery programs during COVID, evolved via upped defense spending to keep the NATO alliance alive and now returns via the €90bn financial loan to Ukraine (which will be borrowed against the bloc’s shared budget). Daily changes on the German yield curve range between + 1 bp (2-yr) and +5 bps (30-yr). The 30-yr yield trades above 3.5% for the first time since 2011. The swap curve moves in parallel fashion with the 10y swap rate testing the 2024 top at 2.95% and the 30y testing the 2023 top at 3.27%. Despite everything what’s going on at bond markets, EUR/USD is unfazed at 1.1720. Changes on stock markets are also minimal.
News & Views
The German Bundesbank today gave a balanced update on its forecasts for the domestic economy. Expected growth for 2026 was slightly downwardly revised to 0.6% (from 0.7% in June). There are signs of an increase in government orders, but it only expects the expansionary spending stance to bolster economic growth more significantly from later on next year. Aside from government spending, the BuBa also expects a resurgence in exports. It sees growth (wda) at 1.3% in 2027 and 1.1% in 2028. The expansionary fiscal policy will only have a limited impact on potential output of the economy (0.4% until 2028) as broader structural reforms are needed. Inflation will decline a little more slowly in the coming years mainly due to expected high wage growth. The Buba sees HICP inflation easing from 2.3% this year to 2.2% next year to reach around 2% in 2027 & 28. Additional spending on defense and infrastructure, tax cuts and larger transfers will be reflected in higher government debt in the coming years. The government deficit ratio will reach 4.8% in 2028, while the debt ratio will have risen to 68%.
Belgian business confidence showed a sharp drop this month (from -8.2 to -11.9). It weakened across all sectors except business-related services. The decline in the trade sector accelerated (-11.8 from -8.9) as business leaders expect demand to drop further and intend to significantly scale back their orders with suppliers. Manufacturing showed a more pessimistic assessment of total order books, employment and demand conditions. Weaker building confidence is due to reduced equipment use and a drop in the order position. Belgian consumer confidence, published yesterday, receded from 2 to -1 after rising since May. There was a particularly sharp downturn in households’ savings intentions (20 from 26). More modest declines were registered for the economic situation in Belgium (-28 from -26), the financial situation of households (-3 from 0) and unemployment.
