Sunset Market Commentary

Markets

• Global core bonds recovered somewhat from yesterday’s severe beating with the front end of the curve outperforming in a bull steepening move. Recall that several tenors across several curves hit multi-annual highs yesterday or even today (eg US 30-yr yield highest since 2004 at 5.44%). US, European and UK 2-yr yields return around 6 bps even as energy prices extend their march higher. Brent crude hit $106/b after the Iranian president refused free navigation through Hormuz unless the US ends its economic naval blockade first. Rumours that Iran is willing to extend the conflict into the Indian Ocean didn’t help either. European stock markets tread water with US indices opening up to 0.6% lower (Nasdaq). The dollar holds its pole position in FX space. EUR/USD closed below 1.14 yesterday and is currently changing hands around 1.1360 with the YtD low at 1.1325 coming ever closer. The Trump/Xi Jinping Summit for now didn’t deliver any market-moving headlines yet.

News & Views

• The Swiss National Bank left its policy rate as expected unchanged at 0%. It deems monetary policy appropriate to keep inflation within the 0%-2% range consistent with price stability and support economic development. The updated conditional inflation forecast (assuming 0% policy rate) showed a small upward revision for the 2026-2028 policy horizon. The SNB now expects inflation to average 0.7%-0.8%-0.8%, up from 0.6%-0.6%-0.7% in June. Swiss GDP growth was exceptionally strong in the second quarter. An unusually robust performance in the chemicals/pharmaceuticals industry meant that GDP overstated the underlying growth momentum. However, even without this effect, growth was solid and broad-based. For 2026 as a whole, the SNB currently expects growth of between 1.5% and 2%. The SNB continues to expect growth of around 1.5% for 2027. Developments in the global economy and in particular the Middle-East create significant risks around both CPI and GDP outlooks. On FX markets, the SNB no longer signals an “increased willingness” to intervene. If necessary, they’d still step in to ensure appropriate monetary conditions. EUR/CHF hit 0.95 for the first time since March of last year earlier this month, up from a YtD low at 0.8910 (strongest CHF ever apart from Jan 2015 volatility).
• The Norwegian central bank raised the policy rate by 25 bps to 4.5% today and is prepared to raise it further warranted by the inflation outlook. Inflation has been above target for several years, the Norges Bank noted. Headline CPI quickened to 3.3% in August from 3% while the underlying gauge accelerated to 3% from 2.7%. High inflation over time can make inflation stickier and harder to bring down again, the central bank reckons, so it stepped up efforts to reduce it. However, the Norges Bank employment mandate means it doesn’t want to restrict the economy more than needed. The economy has drifted down and appears to be slightly below a normal level. The NB’s Regional Network contacts report that it has become easier to recruit labour. The central bank’s updated forecasts project a policy rate that remains close to the current level for a period ahead and remains elevated for longer than expected in June (at least through 2027) before declining somewhat. Even in such a scenario, CPI isn’t expected to return to the 2% target before 2029. Mainland GDP forecasts were adjusted higher to 1% for 2027. 2028 and 2029 saw slight downward revisions to 1% and 1.3%. Norwegian money markets still discount another, final hike by early next year. EUR/NOK is little changed on the day with the pair hovering around 10.80.
• Sweden’s central bank kept rates steady at 1.75% but expects to hike it later this year if the outlook for inflation and economic activity does not change. While there’s still spare capacity in the economy and inflation gauges that exclude for temporary fiscal effects are relatively close to 2%, the central bank’s board “considers that the combination of stronger economic activity and continued supply shocks means that the policy rate should be raised more than projected in the June forecast to stabilise inflation” around target. And if there were signs of a larger and more persistent upturn in inflation, the Riksbank says it will hike rates at a faster pace than in the current forecast. The hawkish shift comes amid upwardly revised inflation forecasts from 1.1%-1.7% to 1.5%-2.1% over the 2026-2027 period. In 2028 inflation would still be 2.4% before easing towards 2% in the year thereafter. Growth was bumped higher to 2.8% (!) for this year (from 2.2%) with minor revisions for 2027 (2.4%, +0.1pt) and 2028 (1.3%, -0.1 pt). The current policy rate forecast implies at least one hike in Q4 this year and another one no later than Q2 of the next. Sweden’s currency whipsawed but currently trades slightly stronger on the day around EUR/SEK 11.26.