Markets
The ECB is ready to raise rates in September, Bloomberg reported citing unnamed sources. Frankfurt kept rates steady yesterday but Lagarde admitted that some asked themselves if a hike should be considered. The ECB chair then pointed at the huge volume of data that’s inbound in the coming weeks, suggesting the discussion is more appropriate at the September 10 gathering. This meeting also produces updated projections that could serve as the basis. In terms of the central bank’s scenarios, the statement spoke of the current energy prices being close to the June baseline (which embedded two to three rate hikes). Lagarde added that the mild one looks “quite unlikely” to materialize and said that the more balanced risk assessment (less upside inflation risks and less downside growth risks) she conveyed in Sintra is no longer the view today. She was mindful of the possibility that a new MoU and/or ceasefire may not trigger the same sharp (oil) market response as it did previously. “Once bitten, twice shy.” Euro area money markets discount a 90% probability for a September hike, with a third end-of-year move given same odds. Regarding such pricing, Lagarde noted that the central bank’s reaction function is “very well understood”.
The reaction to the ECB was overshadowed by the sharp moves on energy markets. Brent oil moved back into triple digit territory after Trump was said to be close to a “massive attack” on Iran (Axios). It is the US president’s response to the Houthis opening a new front in Yemen and choking off another key oil artery in the Bab-el-Mandeb Strait. Dutch TTF gas prices shot up to a new post-war high before paring some of the earlier gains to around €62/MWh. That prompted some more bear flattening in core bond curves. US rates jumped 1.4-5.1 bps higher. European yields rose up to 4.5 bps. The front end in both the euro area and the US confirmed the break above the previous 2026 highs. The US 10-yr did so too. The 10-yr in Germany punched to a new 15-year high. Risk off rolled over stock markets. Tech led the decline with the Nasdaq shedding more than 2%. Support around 25k prevented worse. The US dollar outshined the competition in FX markets. EUR/USD lost the battle for 1.14 but for now stays away from key support at 1.1325. DXY climbed towards the previous YtD highs and USD/JPY rallied towards 164 – a 40 (!) year high.
We expect Iran-related uncertainty to play the dominating role going into the weekend with even high-profile data such as the July PMIs, which will probably have captured some of the energy price rebound, at risk of being ignored unless of a material surprise. Markets are on high alert for another escalation in US strikes after the Axios report yesterday. Brent closing the week above $100 would be an important signal. Watch out for its refined products, particularly diesel. Refining capacity has been severely crippled (including in Russia), putting prices of the industry’s most important energy source on even stronger upward pressure relative to oil. Diesel prices are currently trading as if Brent would change hands around $140-$150. Erring to the side of caution implies a bearish core bond and bullish dollar bias. In tariff news, the Trump administration imposed a 10-12.5% levy on some 60 nations, including the EU, that replaces the 10% temporary global rate (lapses tonight). There’s still a lot of uncertainty, however, for what it means for partners that have struck a trade deal with the US in the meantime. In particular for the EU, which agreed to a 15% tariff cap, it’s unclear whether these new tariffs stack, substitute or are subject to that 15% cap.
News & Views
Japanese inflation excluding fresh food rose in June for the first time in three months, from 1.4% y/y in May to 1.6% in June. The core measure ex. fresh food and energy still slowed to 1.7% from 1.8% in May. Food prices were stable in a monthly perspective, but y/y prices eased from 3.5% to 3.2%. Energy prices, which are subject to government subsides still were below zero y/y (-0.1%) but negative figures from the previous months (e.g. -2.5% y/y in June) are gradually petering out. A similar trend is visible for utility prices. Prices for household goods (2.4% y/y) and medical care (1.3% from 0.0%) also rose compared to May. Services inflation slowed from 1.4% to 1.2%. The data are a final input for the BoJ policy meeting to be held next Friday. A Reuters comment this morning, referring to sources familiar with the thinking within the Bank of Japan, indicates that the BoJ is likely to maintain its warning on the risk of an overshoot of the 2% target, but at the same time that it will indicate that risks have not increased significantly over the previous three months. The central bank will have a new quarterly outlook report available as a reference when setting out its monetary policy path. Amongst others, a weak yen will be an important factor in the debate, with USD/JPY this morning touching levels only just below 164. The BoJ is nevertheless widely expected to keep its policy rate at 1%, with markets positioning for a next move by the final quarter of this year.
. Lagarde added that the mild one looks "quite unlikely" to materialize and said that the more balanced risk assessment (less upside inflation risks and less downside growth risks) she conveyed in Sintra is no longer the view today. She was mindful of the possibility that a new MoU and/or ceasefire may not trigger the same sharp (oil) market response as it did previously. "Once bitten, twice shy." Euro area money markets discount a 90% probability for a September hike, with a third end-of-year move given same odds. Regarding such pricing, Lagarde noted that the central bank's reaction function is "very well understood".){kind=link}