Sunset Market Commetnary

Markets

• The Japanese yen surges towards its strongest levels since May against the US dollar. USD/JPY changes hands around 156 with the 155 support zone nearing fast. BoJ policymaker Takata kickstarted the JPY’s two-day rally yesterday by flagging potential for a jumbo rate increase (50 bps or more instead of 25 bps) and/or hiking back-to-back, upping the pace dramatically from the current twice-a-year. Money markets took into account the probability of a larger hike already at this month’s meeting before paring back bets again after Bloomberg reported that BoJ officials were leaning towards a normal one. With USD/JPY trading around the psychologically important 160 barrier, markets were also on edge for any potential interventions, prompting a short squeeze that extended into a second day today. We suspect the yen’s downside could be better protected going into the September 18 policy meeting. It is followed by three days of Japanese holidays and JPY bears may be wary in light of the potential such thinned liquidity holds for any FX interventions. Currencies in the ex-JPY sphere are up against the USD, pressing DXY lower towards 99. EUR/USD tops 1.16. EUR/GBP reclaims 0.86 for the first time after losing this support-turned-in-resistance early July. Breaking higher would undo all of the technical GBP gains after snapping out of a closing triangle.
• Core bonds get some reprieve today after touching multiyear or even decade highs across advanced economies. The US yield curve turned from bull flattening to steepening on comments from Fed’s Waller with net daily changes varying between -2.5 and -5.5 bps. He said he would support holding rates in September if August inflation confirms the disinflation process. However, and apparently overlooked (or simply ignored) by markets, he added that if the print would come in hot (not an outsized probability), he’d support a hike. And “It may not take much acceleration in inflation to nudge me into supporting tighter policy.” The market reaction should be viewed against the recent sharp yield increase and probably tells more about markets rather than anything else. German rates extended declines in the wake of Waller’s comments to drop 2-4.5 bps in a bull steepener. Gilts outperform by shedding 7.5-8.5 bps across the curve. That’s happening even as oil prices continue to grind higher with Brent briefly topping $97/b. Refined products such as diesel prices in the US have hit a new post-war high. Gas prices are marginally lower on the day although stay at their highest since the war erupted. The Fed policymaker tilted stocks into the green.
• The August US services ISM was the only relevant economic data point on today’s calendar and ahead of tomorrow’s payrolls report. The headline index improved from 54.1 to 55.4, better than expected status quo. While employment dipped further into contraction territory (47.8), new orders surged to 60.9, the highest since February 2023. The prices gauge matched a 4-yr high. US yields and the dollar shrug in a first reaction.

News & Views

• Swiss August consumer price inflation increased by 0.4% M/M and 0.8% Y/Y. Core inflation (ex. fresh and seasonal products, energy and fuel) printed at 0.2% M/M and 0.4% Y/Y. The subseries on domestic goods increased a modest 0.1% M/M and 0.6 Y/Y. Services inflation printed at 0.0% M/M and 1.0% Y/Y, both still indicating ongoing low underlying inflation. The series on imported goods rose 1.4% M/M and 1.5% Y/Y. In this respect, the recent decline of the Swiss franc might have been in play. The outcome was higher than expected but probably won’t change the SNB stance, as it remains in line with its June forecast for 0.7% inflation in Q3. Inflation moving away from the 0% barrier and a softer franc are a positive. Money market discount a <20% probability of a rate hike this year. Other data showed strong Swiss Q2 GDP growth (1.7% Q/Q, 2.8% Y/Y). Sport events adjust growth was 1.5% Q/Q and 2.3% Y/Y. At EUR/CHF 0.9435, the franc yesterday touched its weakest level against the euro since August last year. The franc after the releases gained to EUR/CHF 0.939 currently. With the SNB lagging other central banks in a context of rising real yields globally, a sustained comeback of the franc probably isn’t on the cards.
• Czech Q2 wage data came in softer than expected. Average nominal monthly wages were reported at 6.4%Y/Y from a downwardly revised 6.1%. Real monthly wages rose 4.3% Y/Y from 4.4%. In its summer monetary policy report, the Czech National Bank expected nominal and real Q2 wage growth at 7.3% and 5.1%. In this respect, today’s data can help to mitigate expectations on a further filtering of costs to the broader economy. The CZK 2-y swap yield after the release dropped from 4.61% to currently 4.51%. The koruna lost modest further ground to EUR/CZK 24.22.