Sunset Market Commentary

Markets

The protracted sell-off in (especially ultra-long) bonds since the start of the US-Iran war took a breather today. Two ‘anecdotical topics’ maybe helped to at least temporarily ease pressure. A Japanese 20-y government bond auction received above average investor interest. It’s much too early to draw any conclusion whether LT Japanese bonds have found some kind of acceptable equilibrium. Even so, it muted one of the canaries in the bond coalmine. The Japanese 20-y yield eased 4.5 bps (to 3.72%). The 30-y ceded 6.7 bps (to a still lofty 4.1%). Next to Japan, UK bond markets often also worked as a barometer on inflationary, and even more fiscal related market stress. Here, April UK inflation data also brought some ‘comforting news’. Headline (0.7% M/M; 2.8% Y/Y from 3.3%), core (2.5% Y/Y from 3.1%) and even more services inflation (3.2% from 4.5%) all printed well below market expectations. Headline inflation even dropped to the lowest level since March 2025. The declined was for an important part due to favourable bases effects and measures to mitigate consumers’ utility bills easing the Y/Y figure for housing and consumer related services. Goods CPI rose from 2.1% Y/Y to 2.4%. The April CPI improvement is expected to be reversed later due upward price pressure in commodities and other goods. Even so, the better than expected starting point brought some relieve to the UK bond market too. Markets see it as providing the BOE additional time to finetune its reaction. UK yields are easing between 10 bps (2-y) and 8 bps (30-y). Markets further reduced the probability of a BoE rate hike in June and end July to about 15% and 65% respectively. Interestingly, the UK government today also announced to delay a planned hike in motor fuel duty that was to start in September. This kind of inflation relief evidently comes with a fiscal cost. At the time of writing this report BoE governor Bailey and other MPC members testify before a Parliament Treasury Committee. First comments indeed suggest that the BoE will take time to assess further developments as removal of rate cut expectations tightened financial conditions.

On broader markets some calm also returned after the ‘risk- repositioning’ of the previous days. This at least wasn’t support by any news on the US and Iran coming closer to an agreement. Iran today reacted to threats from President Trump on a new strike with a warning that it might retaliate beyond the Middle East. Despite this ongoing deadlock, the Brent oil price eased slightly (Brent $108 p/b). Evidently, this doesn’t change the broader picture on inflation. Still, US yields ease 1-2 bps across the curve. Bunds even sightly outperform with yields declining from 5 bps (5-10 y) to 3.5 bps (30-y). Still, these moves are ‘insignificant’ in the wake of recent repositioning. On FX markets, the dollar holds recent gains with DXY testing the 99.35 resistance and EUR/USD slipping below the 1.16 big figure. USD/JPY stays locked near 159 despite more MoF warnings on potential JPY interventions. Sterling also reacts constructive to the lower than expected inflation and lower yields. EUR/GBP is losing a few ticks near EUR/GBP 0.8655. Equities also enjoy some relief going into the Nvidia earnings later today (Nasdaq +0.5%, Eurostoxx 50 +0.8%)

News & Views

Belgian consumer confidence continued to weaken in May. The headline index slipped from -9 to -10, the lowest level since April 2025, and extending the decline to 4 consecutive months coming from a 4-yr high at 4 in January. The long term average (2006-2025) is running around -7. The May decline was mainly due to less optimistic expectations concerning unemployment (14 from 6). Compared to March (-45) and April (-43), consumers turned less pessimistic about the general economic situation in Belgium (-37). Households expect a slight improvement in their own financial situation (-4 from -5) but have once again revised downwards their savings intentions (14 from 18; lowest since early 2024) for the coming twelve months.

Bank Indonesia lifted its policy rate by more than expected The first hike since 2022 raised the key rate from 4.75% to 5.25%. This compares to a post-Covid peak rate of 6.25%. Governor Warjiyo called the decision a follow-up step to strengthen the stabilization of the rupiah (after some $10bn of interventions earlier this year) against the impact of heightened global volatility stemming from the Middle East conflict, as well as a preemptive step to ensure inflation in 2026 and 2027 remains within the target range of 1.5%-3.5%. Continued FX interventions and the supervision of banks and corporations with high dollar-purchasing activities are also part of BI’s toolbox. In today’s hawkish shift, BI prioritizes stability and external resilience over economic growth, although it still expects GDP to be within the earlier 4.9%-5.7% projection for this year. INR recovered from an all-time low against the dollar at 17748 to currently 17650. USD/INR changed hands at 16750 before the start of the Middle East conflict.