Sunrise Market Commentary

Markets

A combination of data, comments from the ECB Sintra forum and some final end-of-quarter repositioning were the drivers for trading at the final session of the quarter. July inflation data from EMU members including Germany (HICP -0.2% M/M; 2.4% Y/Y), France (-0.3% M/M; 2% Y/Y) and Italy (0.1% M/M; 3.1% Y/Y) surprised slightly to the downside. There is no one-to-one link between those data and the ECB assessment/comments. Even so, they only support the message from multiple ECB members that the bank should not be in a hurry to raise rates already at the July meeting. As markets only discount less than 10% of a July rate hike, these data didn’t change that much for current market positioning. The market debate on a potential September rate hike remains open (70% discounted). German yields changed less than 1.5 bps across the curve. US data were mixed. June consumer confidence (Conference Board) slightly disappointed at 91.2. The US consumer in particular turned more cautious on their current assessment (116.4 from a downwardly revised 119.4). However, the market focus these days mainly is on labour data. US May JOLTS job openings rose a bigger than expected 7494k, suggesting the labour market remains in a ‘constructive balance’. The initial reaction was modest, but yields were squeezed higher in final hours of Q2 trading. US yields finally added 6.8 bps (2-y) to 9.1 bp (10-y). It didn’t help the dollar. DXY closed little changed at 101.18. Same for EUR/USD (close 1.1422). USD/JPY confirmed Monday’s break above 161.95, closing at 162.55, with the yen at a 40-year low against the dollar. Markets can only guess what will be the next line in the sand for Japanese authorities. Equities again found their composure with tech outperforming (Nasdaq +1.52%, Dow +0.26%).

This morning, most Asian equity indices show modest gains. The dollar gains modestly, with the yen staying defensive (USD/JPY 162.7). Today’s calendar contains the June Flash EMU CPI. Given the national data already available, there is a slight downside risk to the 0.1% M/M; 3% Y/Y expectation. However, the focus regarding ECB policy might be on core and even more on services inflation. In the US, the ADP private job report (expected at 120k) might further fine-tune expectation on tomorrow’s payrolls. The US manufacturing ISM (expected 53.8) should confirm resilient activity. At 15:00 CET the market focus probably will be on the panel debate at the ECB Sintra forum with ECB President Lagarde, Fed Chair Warsh, BoE governor Bailey and BoC governor Macklem. We don’t expect Fed Chair Warsh to provide forward guidance at this forum.

News & Views

ECB sources told Reuters that the central bank is considering to double the minimum reserve requirement ratio to 2% from 1%. Funneling commercial banks’ excess reserves into this unremunerated account would reduce central banks’ combined annual interest bill by almost €4bn, Reuters calculated. The topic turned political in the aftermath of the Covid inflation crisis, which resulted in ECB policy rates as high as 4%. Huge amounts of excess liquidity, the result of years of ECB government bond buying, were back then deposited at the central bank and the rest of the Eurosystem and remunerated at rates not seen in decades. Euro area central banks stacked up losses, hampering their ability to pay dividends to states and potentially resulting in forced capital increases. Raising the minimum reserve requirements would also aid the ECB in mopping up the excess liquidity it created by years of government bond buying (which is now being unwound).

Japanese business mood unexpectedly improved in Q2, the Bank of Japan’s Tankan survey showed. Large manufacturers considered business conditions to have improved, from 16 to 22 – the best since 2018. Sentiment was better in 13 of the 18 subsectors involved, supported probably by the AI-investment boom. Sentiment at non-manufacturers meanwhile brightened further to a new 35-year high. The forward looking component stood at a similar 8-year and 35-year high in the respective sectors and have yet to fully reflect the US-Iran ceasefire (survey reference date was June 11). Industry-wide capex plans amount to 11.5% in the fiscal year through March 2027, a sharp increase from the 3.3% in Q1. Businesses (across size and sector) see CPI at 2.6% five years from now, 0.1 ppt higher than in Q1. This indicator is a critical one in the BoJ’s assessment of long-term inflation expectations. Japanese firms are widely planning increases to their output prices in another sign of strong underlying inflation momentum. The Tankan survey fails to lift JPY spirits. The Japanese yen continues to trade at a 40-year low against the USD just shy of 163 with the only thing preventing rapid further declines being intervention threats by Japanese officials.