Sunrise Market Commentary

Markets

Today’s eco calendar is confined to European figures with the EC’s confidence indicators and first national inflation numbers for June (Spain & Belgium). The EMU CPI figure is due Wednesday (consensus: 3% Y/Y from 3.2% headline & 2.5% Y/Y from 2.6% core). Such outcome reduces the necessity of immediate follow-up action by the ECB with money markets attaching just a slim chance to a July rate hike (7% vs 60% for September). The ECB’s annual forum in Sintra starts with president Lagarde giving an introductory speech after the European closing bell. Wednesday’s panel discussion with Lagarde, Fed chair Warsh, BoE governor Bailey and BoC governor Macklem is the main event. The Belgian debt agency conducts its monthly OLO auction. Three lines are on tap today: OLO 73 (3% Jun2034), OLO 60 (4.25% Mar2041) and OLO 107 (4.35% Jun2056). The BDA aims to raised a combined amount of €2.6-3bn. Selling the upper end of that range would lift this year’s total OLO issuance to €37.3bn, or 72% of this year’s €51.6bn OLO funding need. The lion share of that amount was raised via three new syndications earlier this year (€22bn). This week’s US eco calendar is jam-packed from tomorrow until Thursday. Chicago PMI, consumer confidence and the JOLTS job openings report are due tomorrow. On Wednesday, we’ll get ADP employment change and the ISM manufacturing survey. On Thursday, the June payrolls report will be released exceptionally early with US markets closed on Friday in observance of Independence Day. As US money markets haven’t given up the possibility of a July Fed rate hike (30% implied probability) following last week’s US PCE deflators, US numbers have market-moving potential especially if they portray more strength. Richmond Fed Barkin (non-voter) warned this weekend that “it’s hard to have confidence that you’re headed back to 2% without any more influence from the fed funds rate or the labor market or some other feature that creates disinflation the other way”. While he welcomed a rapid drop in gas prices, he’s also worried about risks of inflation expectations becoming unanchored. “Businesses, when they set prices, take today’s inflation as a factor, and so I think there’s some persistence to inflation. I do worry about that, and that’s part of why I think being modestly restrictive is a reasonable place to be.” Minneapolis Fed Kashkari (voter) revealed that the had one rate hike pencilled in for this year in the latest dot plot. Just like Chicago Fed Goolsbee, he warns for broader inflationary pressures rather than shock-related price increases. Another story line to follow this week are peace talks between the US and Iran scheduled in Doha. This weekend’s US strikes against Iranian military targets highlight the fragile ceasefire and suggest there’s still a lot of distrust between them despite their recent MoU signing. Brent crude so far holds a more optimistic view, trading around $72/b. Finally, (US) risk sentiment is a wildcard with AI valuation concerns still being a topic.

News & Views

The Bank of International Settlements in its annual report said rising energy prices due to the conflict in the Hormuz area have tested the global economic resilience it had seen so far. Looking forward, it identified four so-called pressure points that demand attention. One of them is inflation, which has risen because of the energy shock and now needs monitoring for its broadness and persistency that could ultimately end up in second-round effects. Second is that optimism surrounding AI may not last, particularly if the current capex surge proves unsustainable and/or the AI payoffs turn out to disappoint relative to the investments made. It could trigger a sudden pullback in financing and turn into a protracted investment bust with potential knock on effects on financial conditions and global growth. The third pressure point is the persistence of financial vulnerabilities. “Easy financial conditions could tighten and become a potent amplifier in adverse scenarios where interest rates rise and AI payoffs disappoint. Compressed risk premia and stretched valuations highlight the scope for unwinding.”, the BIS said. The fourth pressure point are mounting fiscal pressures. Debt levels are high and spending demands rising amid energy shocks and geopolitical tensions. This coincides with a “less benign financial environment” (read: higher interest rates).

The European Commission is about to introduce a 15% levy on exports of aluminum scrap to outside the bloc, the Financial Times reported. Such a move would be the first of its kind and is aimed at preventing the what it considers valuable metal going to places including the US and Asia. Demand from outside has increased in recent months due to the closure of the Hormuz Strait, which reduced Gulf exports. EU aluminum producers say these overseas smelters are making bigger profits by buying European scrap, melt it again and sell the fresh metal at a premium back to the bloc. The proposal is planned for a vote on September 9, people familiar told the FT.