Sunset Market Commentary

Markets

The sense of disappointment following the Chinese 10 bps rate cut found its way through European markets as well. Stocks at some point ceded about 0.6% before paring losses to just 0.1% (EuroStoxx 50). Wall Street opens 0.1-0.5% lower. US yields eked out a few bps at the reopen after a long weekend (Juneteenth) but gains evaporated throughout the European session and in early US dealings even turned into losses of 2.3-4.6 bps. Strong US housing data suggesting the rate-sensitive sector stands its ground pretty well but were unable to prevent declines from happening. Building permits in May rose 5.2% m/m vs 0.6% expected, bringing the amount to 1491k (vs 1425). The series is considered a leading indicator as it marks the first step in the home building process. Shovel-in-the-ground housing starts seared a whopping 21.7% whereas expectations were for a minor 0.1% contraction. The total amount stood at 1631k, the highest in a year. The data follow up on yesterday’s bigger than expected rebound in the NAHB housing market index. German yields gapped lower at the open with lower-than-expected PPI numbers (-1.4% m/m vs -0.7% expected) explaining the move. Losses deepened from there on out into net daily changes ranging between -3.6 bps (2-y) to -11.6 bps (30-y). Rehn from Finland was the latest ECB policymaker to note the underlying inflation’s disappointing decline over the past months. Governing council member Muller later expressed worry over fast rising wages, which may get inflation firmly anchored to 2% over the medium term more complicated. His comments failed to deliver any market response though. Gilts outperform global peers after doing the exact opposite yesterday. Yields tank 12.6-15.7 bps across the curve compared to the 3.1-14 bps gains in a move that deepened the inversion on Monday. The amount of volatility underscores the important week UK assets are facing, kicking off with UK CPI numbers tomorrow.

The Japanese yen outperforms on currency markets today. USD/JPY eases towards 141.51 while EUR/JPY dips back below 155. Especially the latter combination is still trading at strong levels though. On the other side of the spectrum we have the Aussie dollar, trading heavily after what were perceived as dovish meeting minutes. The unexpected rate hike turned out to be the result of “finely balanced” arguments rather than an outright hawkish assessment. The euro and the dollar trade on equal footing. The pair holds a tight balance north of 1.09. The trade-weighted dollar (DXY) ekes out a slight gain to 102.60. Sterling declines in a profit-taking move going into the first checkpoint. EUR/GBP rebounds towards 0.8571, up from 0.8537 at the open.

News & Views

Turkish labour minister Vedat Isikhan said that the minimum wage will rise by 34% to TRY 11 402. It’s the second hike this year, bringing the minimum compensation 107% higher than end 2022. Of course, we need to keep in mind that Turkish inflation is still running at 40% Y/Y (85% peak in October of last year). The head of Turkey’s labour unions confederation hoped that authorities (both fiscal & monetary) will step up efforts to slow inflation down or wage hikes risk becoming meaningless. The Turkish central bank meets a first time on Thursday under new governor Hafize Gaye Erkan who got the job in the wake of a broad reshuffle after Turkey presidential elections earlier this year. The earlier decision by the new economic minister to stop FX interventions to synthetically prop up the currency (EUR/TRY 26 from 22 ahead of decision) is expected to get the backing of a significant rate hike from the current 8.5%. The consensus estimate stands at 20% but it’s actually anyone’s guess with prognosis ranging between 14% and 40%.

The Hungarian central bank (MNB) cut its overnight deposit rate by 100 bps for a second meeting running. It now stands at 16% and will be further reduced towards the base rate of 13% if risks continue to recede. The former was introduced to stem unwarranted selling pressure on the forint while the latter should be sufficient to tame inflation. The MNB sees CPI this year in a 16.5%-18.5% range before dropping steeply to 3.5%-5.5% next year. GDP prognosis are 0%-1.5% and 3.5%-4.5% for respectively this year and next. The forint stomachs this second, anticipated, rate cut again well with EUR/HUF broadly unchanged around 372 and keeping the 370-support area (YTD lows) well in sight. HUF swap yields lose 10 bps (2-yr) to 6 bps (30-yr).