Sunrise Market Commentary

Markets

• The ‘highest since’ narrative on global bond markets yesterday simply continued. This time it was again mostly a further rise in energy prices due to a new intensification of the Iran conflict that served as the ‘explanation’ for the daily price action. However, other factors (e.g. fiscal risk premia, abundant supply on bond markets) still play in the background. Brent oil jumped from opening levels around $91 p/b close near $95 p/b. The European gas future also touched a new high since the start of the conflict in the Middle East (close €72.2 MWh). The move was reinforced by headlines on new mutual attacks between the US and Iran and on comments from president Trump that suggested more of this kind of operation might be on the cards, indicating that any solution was again very far away. US yields added between 5.8 bps (2-y) and 3.1 bps (30-y). Interestingly, this time it was again the inflation component rather than the real yield that drove the move. An energy driven supply shock. The US manufacturing ISM was marginally softer than expected, but still OK (54.6, from 55.6, orders and employment also eased slightly, but the prices paid index at 71.1 remained high) and had little impact on trading. German yields added between 2.6 bps (2-y) and 0.5 bps (30-y) as the EMU flash CPI at 3.3% Y/Y for the headline and 2.4% for core was close to expectations. In this respect, ECB’s Simkus indicated that a September rate hike is very likely and that this hike is not going to be enough, as higher energy prices and prices for agricultural commodities and a stronger than expected economy suggest prices shifting higher. He concluded that this should lead to projections that would require the interest rate path to move up a bit in order to keep medium term inflation at 2%. In an interview in the FT, ECB Makhlouf gave similar indications. He also suggested that a deposit rate of 2.5% would not slow economic activity, indicating that restrictive territory would start above 2.75%. On other markets, equities suffered from global uncertainty and higher yields (S&P 500 -0.71%, Eurostoxx 50 -0.80%). In this risk-off context, the dollar outperformed. EUR/USD eased close just below 1.16 (from 1.162). DXY gained from 99.4 to close near 99.7.
• This morning, especially short-term yields in Japan continue their ascent. Hawkish BOJ Member Takata commented that the next rate hike to be 25 bps is not a foregone conclusion and that back to back rate hikes are possible. The yen is gaining some ground with USD/JPY slipping from 160+ levels to currently trade near 159.7. Later today, the calendar contains the US ADP job data. A big surprise is probably needed to move markets. With Brent still at $95+ levels and no indication otherwise, there is no reason to expect a change in the established trends.

News & Views

• The central bank of New Zealand raised the policy rate by 25 bps to 2.75%. Inflation increased to 4.1% in Q2, driven by higher fuel prices. Core inflation, expected wage growth, and inflation expectations remain consistent with inflation returning to the 1 to 3% target band by mid-2027 and the 2% target mid-point later next year, the central bank stated. With the economic recovery expected to both strengthen and broaden and labour market conditions gradually improving, the Reserve Bank of New Zealand thought it appropriate to remove monetary stimulus to return inflation to target while still supporting growth and employment. Acting now reduces the risk that the RBNZ needs to do more later, is the rationale. That shows in the updated rate path, which has been pulled lower slightly compared to the May projections. The new forecasts now show one more move before the end of the year, which would turn policy into a neutral stance. That’s less than markets were expecting just yesterday, when they fully priced in two additional hikes (including today’s) and about a one-in-four chance for a third. The kiwi sovereign curve bull steepens with rates dropping around 7 bps at the front. The kiwi dollar slips to NZD/USD 0.584 (August low).
• South Korean inflation rose by 0.2% m/m to be up 3.1% on an annual basis last month. While up from July’s 2.8%, the numbers undershot expectations for 0.4% m/m and 3.2% y/y. Core inflation came in at the expected 3.4%, sharply up from 2.6% and the fastest clip in three years. Base effects (a 50% discount on mobile charges that phased out) explain part of the move but prices rises were increasing even before that. Sticky core inflation is expected to keep the Bank of Korea vigilant on inflation against the backdrop of an AI-driven (semiconductor) economic boom. The central bank has hiked back-to-back last week and warned that further increases may be required. The won trades little changed around USD/KRW 1368 today. While still low from a long-term point of view, the KRW (USD) did strengthen (weaken) sharply over the last weeks from its 17-year low (high) north of 1550 seen this summer.