Markets
US retail sales were the headliner today. They printed slightly stronger than expected when considering the upward revisions to an already strong month of May. Headline turnover increased by 0.2%. That’s actually not bad when taking into account the series aren’t adjusted for price swings. Indeed, sales from gasoline stations weighed down on the overall number by dropping -5.3%, reflecting at least partially the significant drop in crude oil last month. A core gauge that excludes car and gas sales rose 0.4% after an upwardly revised 0.8% in May while the private consumption proxy used in GDP calculations (control group) added 0.5% (0.8% vs the month before). Seven out of the 13 categories rose with sporting goods, motor vehicles & parts and online sales increasing the most. Eating & drinking, the only services-related category, rose by just 0.1%.
While decent if not strong, it wasn’t the retail sales triggering today’s market moves. Geopolitics did. President Trump earlier warned Iran this week the US would start bombing civilian infrastructure including bridges and power stations if it doesn’t get back to the negotiating table. Iran has now reportedly instructed its Houthi allies in Yemen to shut the Bab-al-Mandab strait if the US follows through. The Strait connects the Red Sea to the Indian Ocean through the Gulf of Aden and is a transit for an estimated 10% of global oil supply. That share since the Iran war probably even rose. The market reaction follows the well-known pattern. Oil prices rebounded from the intraday lows (Brent near $86), gas prices did the same to hit a new multi-month high (€55.3/MWh). Core bonds sell off. The front end of the curve repositions in function of increased central bank tightening bets. For the ECB, markets assume a cumulative 45 bps in additional hikes this year. The Fed is seen hiking by 28 bps and the Bank of England by 40 bps. 2-yr yields rise 3-3.5 bps in the US and Europe (where the 2026 highs remain under attack) and almost 5 bps in the UK. The long end takes a hit from rising inflation expectations and risk premia. The US 10-30-yr bucket adds 4 bps. European swap rates inch around 3 bps higher in the same segment. The 30-yr at some point was less than a basis point away from a new 15-year high. The US dollar kept a minor upper hand against most peers in the FX landscape. EUR/USD gives back some of yesterday’s gains to trade around 1.145. DXY rises towards 100.6. Sterling’s strong momentum yesterday dwindled today. The FT reported that Labour’s fiscally more conservative Mahmood would be tapped as new chancellor instead of Miliband. That eased some concerns on UK fiscal sustainability, prompting a break of EUR/GBP below 0.85 towards support at 0.8468. The latter is doing its job for the time being. GBP/USD returned a two-month high at 1.354 to 1.351 currently. Blockbuster earnings and a solid outlook from semiconductor bellwether TSMC failed to inspire the AI/tech sector, on the contrary. Stock markets in the US open lower with the Nasdaq slipping about a percent as questions continue to linger on the profitability of massive capital investments.
News & Views
The National Bank of Poland published a set of underlying inflation numbers today. Core CPI excluding food and energy prices rose by 0.3% M/M with the Y/Y-change hovering around 3% for the third consecutive month. That’s above the 2.5% mid-point of the 1.5%-3.5% tolerance band. Other core gauges which respectively exclude the most volatile prices or the 15% trimmed mean both slowed from 3.3% to 2.8% Y/Y. Inflation excluding administered prices fell by 0.6% M/M to 2.1% Y/Y (from 2.8%). Today’s data printed near consensus, leaving no traces on markets. Polish money markets expect policy rate stability over the next 12 months amid mixed messaging from central bank members and awaiting the outcome of summer inflation readings given the expiry of fiscal measures capping energy bills.
Minutes of the June policy meeting by the Swiss National Bank confirmed that monetary policy (0% policy rate) is continuing to have an expansionary effect. Real interest rates are currently negative and below their long-term equilibrium. Money markets attach a 40% probability to a rate hike at this year’s final (December) SNB meeting. Swiss inflation remains stuck in the lower half of the 0%-2% target range with the central bank labelling the impact of the energy shock as largely temporary. SNB Minutes also showed relief that a weaker franc is contributing to easier monetary conditions (EUR/CHF 0.9250 now vs 0.90 in March). In Q1, the SNB was still fighting CHF strength via FX purchases, part of which they were able to reverse in May.
