Sunset Market Commentary

Markets

July US producer price inflation pushed US Treasuries higher for the third time in the past five sessions. Previous attempts to lock in sustained gains, after weak payrolls last Friday and following yesterday’s in-line CPI release, failed but eventually one straw broke the camel’s back. Looking at the numbers, they’re not outright soft. The headline PPI pace was slower than expected (0% flat) with the Y/Y-figure falling from 5.5% to 4.7% (vs 4.9% consensus). Core PPI gauges on the other hand were more stubborn, ranging between 0.2% & 0.4% M/M and printing above consensus Y/Y (4.2% excl food & energy and 4.7% excl food, energy & trade). On top, retreating transportation costs are likely to see a reversal in August in line with energy prices. The key message from yesterday and today probably is that inflation is not re-accelerating. If upside inflation risks don’t materialize, it might keep the Fed at bay for longer. That seems to be the current market reasoning at least. US yields shed 4.8 bps (30-yr) to 6.7 bps (5-yr) as September rate hike bets are further scaled down from 50% to 33%. US Treasuries outperform German Bunds and UK Gilts today with German/UK yields only losing up to 3 bps at the front end of the curve. Loss of interest rate support doesn’t harm the dollar with EUR/USD currently changing hands around 1.1535. JPY fails to capitalize on this morning’s Bloomberg report that the Japanese government supports faster BoJ tightening (September or October). The yen already lost half of the advance following joint US/Japan FX interventions end July. Markets are testing policy makers’ resolve, both on the government and the central bank level. Japanese money markets attach a 75% probability to a September rate hike with such action fully discounted by October. Sterling (EUR/GBP 0.8540) is unmoved by preliminary Q2 GDP data. Quarterly growth slowed from 0.6% to a still decent 0.4% (1.2% Y/Y), broadly in line with expectations. Details were solid though with private consumption (0.3% Q/Q), gross fixed capital formation (1.2% Q/Q), exports & imports (both 0.5% Q/Q) all beating consensus. Government spending (-0.3% Q/Q) was a drag on growth.

News & Views

The Norwegian central bank kept its policy rate unchanged at 4.25% today in a widely anticipated decision. In June the Committee assessed that it WOULD LIKELY BE necessary to raise the policy rate further at one of the forthcoming meetings. However, this week’s softer July core CPI print tilted the balance somewhat. The Norges Bank welcomed slower inflation (2.7% Y/Y vs 3.3% forecast in June policy report for CPI ATE) but thinks it is too early to conclude that the inflation outlook has changed materially. Its forward guidance did change though: “it MAY become necessary to raise the policy rate”. The Committee judges that a restrictive monetary policy stance is still needed to bring inflation down to target within a reasonable time horizon, but does not want to restrict the economy more than needed. Apart from inflation developments, the Norges Bank notes that economic activity, the labour market and the EUR/NOK FX-rate all moved broadly as expected. Odds of a 25 bps September rate hike, when a new Monetary Policy Report will be released, are currently 60%. The NOK trades a tad weaker in the aftermath of today’s decision with a lower oil prices weighing as well. EUR/NOK moved from 10.93 to 11, holding well within the trading band of the past couple of months (10.75-11.30).

The Turkish central bank (CBRT) presented its latest quarterly inflation report today. They raised the end-2026 CPI forecast from 26% in the May report to 28% while keeping the interim-target of 24% unchanged. End-2027 and end-2028 forecasts were left unchanged at respectively 15% and 9%. Governor Karahan called the central bank’s inflation performance a partial failure. Inflation was brought back from a 75%+ peak towards the low 30s but has remained above (short-term) targets. Consequent external shocks, and a very serious global price rise driven by energy supply issues, are to blame though. The CBRT vows to maintain a tight monetary policy stance (policy rate of 37% since January). It believes that monetary policy is working even as supply shocks caused a delay, given weak domestic demand and falling core inflation. The Turkish lira is unfazed today. It continues a structural weakening trend with EUR/TRY at an all-time high above 55.