Markets
Core bonds grinded lower in a bear flattening move. US Treasuries yields added 1.4-3.7 bps. Doing so brought the 2-yr yield to its highest level since February 2025. The longest 30-yr tenor also drew attention by having held above 5% for the longest stretch since 2007, according to Bloomberg. With policy rates 150 bps lower than they were back then, it underscores how risk premia (e.g. public finances) have come back with a vengeance after years of artificial suppression. For the same reason we see the European 30-year swap (-1.6 bps) hovering near the very recent new 15-year highs. Other maturities added up to 3.8 bps at the front end of the curve. The 2-yr swap smashed through the earlier YtD highs to trade at the highest levels since July 2024. ECB hiking bets have jumped with the cumulative amount of expected tightening (nearly four hikes by mid-2027) now even topping what was discounted at the height of the Middle East war in March/April. That follows of course the ongoing surge in energy prices. Brent oil has shot up 35% from the lows seen early July. Another bump this morning after the first Saudi ships were targeted by Houthis in the Red Sea brings the price of one barrel to just shy of $96. Gas prices (Dutch TTF) at any point since the Iran war haven’t closed higher than they did yesterday (€62.5/MWh). They are marching higher again this morning to beyond €63. The dollar FX market contrasted in being an ocean of calm. EUR/USD eked out tiny gains around the 1.14 barrier while DXY barely budged around 101. USD/JPY wasn’t impressed by a report that the BoJ is open to increase rates faster than the market expects. The pair is going nowhere around 40-year highs. Sterling’s recent slide after a stellar run in the first half of July continued. EUR/GBP is closing in on the 0.855 barrier. Wall Street finished with minor losses going into the earnings of Alphabet. The Big Tech/AI company printed stellar results and raised its 2026 capex target to around $200 bln. Massive investments, however, resulted in the first negative free cash flow since the company went public in 2004. That probably helps explain the cautious investor response.
The ECB is in focus today. Since policymakers have ruled out any action, the main policy rate is all but certain to remain at 2.25%. Frankfurt won’t commit to anything but markets will be very attentive to clues for September, which features updated forecasts. If the ECB had to update the scenarios today, it would have to take into account an oil price futures curve that is $1.5-$2 per barrel lower but a gas price curve that’s about €12-€14 higher. Money market pricing quickly went from the central bank’s milder scenario over the base towards the adverse one. President Lagarde will be cautious in being explicit about the monetary policy response to the upcoming inflation shock. Confirming nor rejecting the current market expectations may tactically be the best move in a fast changing geopolitical environment. September is priced in for 90% with a third move by December given an equal chance.
News & Views
The Australian June labour market report beat expectations by a big margin. Employment growth accelerated from 44k in May to 76.3K in June. The rise was mainly driven by part time employment (47k), but full time job growth also printed at a solid 29.3k. The unemployment rate was unchanged at 4.4% as the participation rate grew from 66.7% to 67%. Solid labour market data allow the Reserve Bank of Australia to keep its focus on inflation. The RBA in June kept its policy rate unchanged at 4.35% after raising three times by 25 bps. The RBA concluded that after the tightening earlier this year ‘Monetary policy is well placed to respond to developments’. It still committed to ‘do what it considers necessary to achieve that outcome, including increasing the cash rate target further if required’. With current strong labour market data and energy prices rising again, markets again fully discount an additional RBA rate hike by the end of the year. The 3-y government bond yield rose 6.3 bps to 4.62%. The Aussie dollar gained modestly from the AUD/USD 0.669 area to currently 0.701. CPI data will be published next Wednesday, 29 July.
GDP growth in South Korea was reported stronger than expected at 0.6% Q/Q, bringing the Y/Y measure to 3.7%. The Q2 performance came after an even stronger 1.8% Q/Q and 3.8% Y/Y in Q1. Manufacturing (1.2% Q/Q) and services growth (+1.1%) were important drivers as construction declined by 1.9% Q/Q. The data indicate that exports of semiconductors contributed to a solid growth performance alongside domestic demand. The Bank of Korea last week raised its policy rate by 25 bps to 2.75%. The strong Q2 growth data suggest that the BOK might raise the policy rate further during the second half of the year, by at least one more 25 bps step. CPI inflation in Korea was reported at 3.2% in June. The won this morning extended its rebound with USD/KRW easing to 1466.
