Sunset Market Commentary

Markets

Yesterday’s US inflation numbers still resonated during European trading hours. Both headline and core inflation rose a tad less than forecast (0.2% M/M vs 0.3% M/M) with base effects pulling especially headline inflation (one last month?) significantly down. They triggered a huge rally in US Treasuries – extended to core bonds in general – and stock markets while pulling the dollar below first support levels on a trade weighted basis and against most majors. The absence of European eco data resulted in a countdown to the early US releases. Minutes of the previous ECB meeting provided some minor distraction but confirmed general thinking of a certain 25 bps rate hike in July followed by a very likely 25 bps rate hike in September. They showed broad consensus for the delivered 25 bps hike in June, but revealed that some called for a 50 bps move. Doubts over core inflation are key going forward. June US producer price inflation and weekly jobless claims… gave conflicting signals. In the same vein that last week’s activity data and labour market numbers caused a hawkish market sell-off, this week’s (inflation) survey and actual price figures triggered a dovish rebound. US weekly jobless claims fell from 249k to 237k whereas markets expected a stabilization. They are now firmly back in the +- 230k-245k range they were in since early March with the exception of a tick-up (to 260k area) early June. Headline and core PPI both increased by 0.1% M/M (vs +0.2% M/M expected). The annual figure for final demand slowed to 0.1% Y/Y, the smallest since 2020. Excluding food and energy, the increase was 2.4% Y/Y (smallest since Jan 2021). The post US CPI-moves petered out after the mixed figures. US yields lose 11 bps (2-yr) to 3 bps (30-yr) at the time of writing. The US 10-yr yield tested last week’s broken resistance-turned-support at 3.8%. German yields fall by 7 bps (30-yr) to 10 bps (5-yr). The trade-weighted dollar currently changes hands at 100.16 from an open at 100.52 and confirming yesterday’s break below the YTD low at 100.82. EUR/USD trades at 1.1180 from a start at 1.1129 and confirming yesterday’s break above the YTD top at 1.1095. High profile resistance stands at 1.1274 (62% retracement from 2021-2022 decline). European stock markets add 0.5% to 1% with major indices opening around 0.5% higher.

News & Views

Czech inflation eased further in June as expected. Consumer prices rose by 0.3% M/M. Price growth compared to same month last year slowed from 11.1% in May to 9.7% in June. It was the first time since January 2022 for Y/Y inflation to print below 10%. Recreation and culture prices jumped 2.2% M/M mainly due to seasonal package holidays. Prices for hotels and restaurants also continued to rise (0.7% M/M). Prices of household equipment declined 0.6% M/M. In a comment at its website, the CNB highlighted that the slowdown in inflation was faster than the MPR Spring forecast (10.1%). According to CNB the slowdown is mainly due to weaker than expected core inflation. A faster decline in fuel prices also contributes to the positive development. Price growth in administered prices remained somewhat higher than expected in the spring forecast. The CNB concludes that “observed price developments bear out the expectations of the spring forecast that inflation will continue to fall sharply during spring and summer”. Inflation will decline to the CNB’s 2% target over the monetary policy horizon. The Czech 2-yr swap yield today declines an additional 20 bps to 5.24%. Even so, the koruna still gains modestly on the global risk-on sentiment (EUR/CZK 23.75).

In its July 2023 fiscal risk and sustainability report, the UK office for Budget Responsibility painted a rather alarming picture on the UK budged and debt situation. This rapid succession of shocks has delivered the deepest recession in three centuries, the sharpest rise in energy prices since the 1970s, and the steepest sustained rise in borrowing costs since the 1990s the report says. It pushed government borrowing to its highest level since the mid-1940s, the stock of government debt to its highest level since the early 1960s, and the cost of servicing that debt to its highest since the late 1980s. At the same time, the government growing costs from ageing, a warming planet and rising geopolitical tensions have an impact in the near future. In a scenario labeled as rather optimistic, the UK debt might reach 310% of GDP by the mid 2070’s. A higher degree of inflation-linked financing and shorter maturities, amongst others make UK debt more vulnerable than other peers.