Sunrise Market Commentary

Markets

Core bonds rallied yesterday with US Treasuries outperforming German Bunds. Yields in the US fell 5.2 (2-yr) to >10 bps (30-yr). German rates eased 2.4-6 bps in a similar curve shift. End-of-quarter (extension) buying and an ongoing decline in oil prices inspired most of the drop. Brent oil yanked lower on unrelenting optimism that flows in the Strait can and will normalize quickly. The $73.74 close was the lowest since the war in Iran erupted. Further easing this morning even pushed the price of a barrel below the pre-conflict levels. Inflation risk premia retreat and support the long end of the curve in particular. The bid for shorter maturities was there too but less dramatic. ECB rate hike bets continue to linger with markets expecting at least one more move in 2026 (to 2.5%). ECB board member Schnabel in an interview with Die Zeit newspaper said the central bank would probably have to increase rates again. She welcomed the peace deal but warned that it is no reason for monetary policy to let its guard down. The current 2.25% isn’t restrictive yet in her view. While current oil prices are down significantly, the ECB is watching prices for future deliveries even more closely in order to determine whether the 2% inflation target is reachable in the medium term. “And those prices remain elevated,” she noted. It was Schnabel who put the cat among the pigeons end-May by warning that the ECB could no longer look through the energy price shock, signalling the eventual hike in June. Several other ECB members will hit the wires today, including chief economist Lane (although he offered his views already earlier this week). US money markets ramped up Fed hike bets on solid economic data and the Fed’s hawkish tilt under Warsh. Despite the oil price drop, there’s still some 35 bps of tightening priced in for 2026. Today’s May PCE inflation data has the potential to at least support the idea. Consensus expects headline PCE to accelerate from 3.8% to 4.1%, moving further away from the 2% target. Core PCE is seen at 3.4% vs 3.3% in April. This compares to our KBC nowcast of 4% and 3.3% respectively. Services PCE, however, could come in at a sticky 3.7%. This is the part where Fed’s Goolsbee earlier this week was worried about. This component has less to do with one-off price shocks such as the energy and tariff ones, suggesting strong underlying inflation currents, supported by a strong economy. It’s against this backdrop that the bar appears high to fully price out lingering hiking speculation. That should support the downside in front-end (eg. 4% in 2-yr) yields and keep USD in favour. The technical charts complement the fundamental dollar case. EUR/USD yesterday confirmed the break below 1.1392, creating further momentum for a return towards 1.12/1.11. DXY closes in on the 102 (2025 correction high) level with 102.86 as the next target. EUR/GBP hit an intraday low yesterday just north of the 0.86-support before bouncing back to 0.862. The jury remains out whether GBP post-Burnham honeymoon period is already nearing the end.

News & Views

May Australian employment numbers reversed the weak (and downwardly revised) April labour market growth. The economy added 40.3k jobs (from -40.7k). Details showed full-time employment growing by 5k and part-time employment by 35k. The unemployment rate ticking down from 4.5% to 4.4% even as the participation rate moved higher, from 66.6% to 66.7%. The head of the Australian Bureau of labour statistics said that the backlog of people waiting to start a job has eased. Yesterday’s sticky core CPI and today’s labour market data don’t remove market doubt on whether or not the Reserve Bank of Australia will hike its policy rate one last time later this year. The market implied probability of November action is 50%, to be compared with 60% at the end of last week. AUD/USD holds around 0.69 this morning after losing 0.70 support earlier this week on genuine USD strength. Technical support stands at 0.6833.

Hungarian economic sentiment improved from -6.7 to -6.2 in June, its best level since April 2022. While overall business confidence remained broadly unchanged (-8.4 from -8.8), consumer confidence continued to improve (-0.1 from -0.9; near 7-yr high). Across business sectors, the picture was mixed: industrial confidence declined slightly, construction stagnated, while retail and especially services (near 4-yr high) strengthened. Employment expectations remained stable overall while inflationary pressures eased. The share of companies planning price increases fell significantly from May, while those planning price cuts rose slightly. On the consumer side, financial perceptions improved further, both regarding past and expected future conditions. However, views on the broader economy and willingness to make large purchases remained unchanged.