Sunrise Market Commentary

There will be no KBC Sunrise from Monday August 3 until Monday August 10. We resume our publication on Tuesday August 12.

Markets

Markets yesterday had plenty of data to keep an eye on. Despite headwinds from the conflict in the Middle East, preliminary EMU Q2 GDP growth surprised positively (0.4% Q/Q 1.0% Y/Y) even as we have to wait for further details for in depth analysis. At first glance, US Q2 growth (1.5% QoQ annualised) was a bit disappointing, but underlying series still showed solid domestic demand. The US inflation data (PCE deflators) was close to expectations. Ahead of the flash July EMU CPI estimate to be published today, German and Spanish CPI data yesterday mostly were marginally stronger than expected. The data only had a limited impact on trading. On interest rate markets, curve steepening post Wednesday’s press conference of Fed Chair Warsh continued (US 2-y -2.7 bps, 30-y +1.3 bps). This move was even a bit more pronounced in EMU (2-y -5.9 bps; 30-y +1.2 bp). The dollar weakened further. (EUR/USD close 1.153). Initially, this was mostly some follow-through price action in the aftermath of Wednesday’s Fed policy meeting. Later, the dollar fell further after (unconfirmed) interventions by Japan to block the fall of the yen. USD/JPY closed at 159.5 (from 163.4). Stock exchanges put their AI fears on hold (for a while?) (Nasdaq +2.78%, Eurostoxx 50 +1.53%).

The Bank of England (BoE) kept its policy rate unchanged at 3.75%. The impact of the conflict in the Middle East on both growth and inflation is highly uncertain. For now, the BoE doesn’t see much second round inflation effects. Growth and the labour market are also assessed being rather weak. This should temper inflation. 3 MPC members voted to raise the interest rate anyway. The majority (including chairman Bailey) hopes to be able to avoid increases as much as possible so as not to unnecessarily slow down growth. The market mainly picked up on that last signal. The British 2-year yield fell 11 bpn. The market pushed the expectation of a possible rate hike further backwards (Sept 30%). Still, the sterling gained some ground, but that was probably more due to a better overall risk sentiment as EUR/GBP closed near 0.856.

This morning, the BOJ kept its policy rate unchanged at 1.0%, but new forecasts suggest further hikes are needed. The BOJ slightly upward revised its forecast for this (0.6%) and next year (0.7%). The projected rate of increase in the CPI (all items less fresh food) for fiscal 2026 is lower, but this was due to factors such as the effects of government’s measures to reduce the household burden of higher energy prices. Still core inflation measures for this and next year are seen holding well above the 2.0% target. With regard to the risk balance, risks to economic activity are generally seen as balanced. Regarding the outlook for the CPI, risks are seen skewed to the upside. USD/JPY after yesterday’s (likely) interventions is holding near 160.4. Bloomberg also mentions people with knowledge of the matter referring to US rate checking. US Treasury Secretary Scott Bessent in an interview assessed the yen as being very undervalued. Asian markets this morning mostly join the positive sentiment from the US yesterday. Later today, among others, we keep an eye at the EMU Flash CPI estimated. Headline inflation is expected slightly higher at 0.1% M/M and 2.9% Y/Y (from 2.8%). Core is expected stable at 2.4%.

News & Views

The official China July PMI data this morning surprised substantially to the downside. The composite index dropped from 50.6 to 49.3. Manufacturing activity also fell below the 50 reference (49.2 from 50.3). Non-manufacturing also fell from 50.2 to 49.0. Most sub-indices confirmed underlying eco weakness. The data suggest that authorities might consider additional monetary and fiscal stimulus in a not that distant future. The yuan this morning still held strong at USD/CNY 6.7475, but over here some USD weakness might be in play.