Markets
Most markets were mired in technical trading today. Core bonds, at least up until now, are taking a breather after soft US labour market data that last week supported bets for accelerated Fed easing and a further easing of (global) financial conditions. Markets usually take a forward looking approach, mostly ignoring statistical data revisions. For once, this might be different with the BLS benchmark payrolls revision spanning the period April 2024-March 2025 to be published later today. With markets expecting in a downward revision of potentially 700k or more, the report in some way might profoundly ‘rewrite recent US economic history’, with equally important consequences for the Fed’s assessment. After the recent bond market rally and with money markets already discounting a sub 3% Fed policy rate, US yield markets today are shifting to a wait-and-see modus ahead of the BLS revision. US yields add between 1.5 bp (2-y) and 2.5 bps (30-y). US price data tomorrow (PPI) and on Thursday (CPI) maybe also cause some caution. Questions remains how much weight inflation still gets in both markets’ and the Fed’s assessment. With the Fed policy rate still in restrictive territory, we continue to see the risk for faster Fed easing in case of weak (labour) data. Later today, the US Treasury will sell $58 of 3-y notes. Interesting to see investor appetite after the recent rally and given higher yield levels for short-term US T-bills. Also little news on this side of the Atlantic. The German curve corrects sightly on recent flattening move with yields rising between 1.2 bps (2-y) and 3.0 bps (30-y). The (unsurprising) fall of the Bayrou government in France and President Macron restarting its exercise to find a new Prime Minister, is holding the French-German 10-y spread at a fragile ‘equilibrium’ near 80 bps. Both US equities (S&P 500 unchanged, EuroStoxx 50 -0.2%) are going nowhere. Oil jumps on the headlines of an Israeli strike against senior Hamas leadership in Doha (Brent $ 67 p/b).
On FX markets, the dollar took a weak start in Europe this morning, but reversed initial losses later in the session. DXY trades marginally higher at 97.55. EUR/USD came within reach of the 1.1789 level (24 July top and finally hurdle ahead of the 1.1829 YTD top). However, a real test/break didn’t occur yet. A combination of USD-rebound and euro-softness currently brings EUR/USD back to the 1.174 area. The yen slightly outperforms both the dollar and the euro on headlines of a BOJ still considering a rate hike this year (USD/JPY 146.8; EUR/JPY 172.35).
News & Views
Hungarian inflation figures printed exactly in line with consensus for the month of August. There was no price growth on average on a monthly basis with the annual figure stabilizing at 4.3%, above the central bank’s 3% inflation target. A separate analysis by the MNB shows core inflation excluding processed food dipping below 4% (3.9% Y/Y) for the first time since August 2021. Its sticky price inflation gauge was unchanged at 4.8% Y/Y Monthly data showed food and energy prices unchanged. The highest price rise of 0.6% was measured for alcoholic beverages and tobacco. Service prices rose by 0.5% on average and those of durable consumer goods by 0.4% M/M. In annual terms, Hungarian food prices rose by 5.9% with energy prices increasing by 11%. Services became 5.4% more expensive while consumer durable prices were up by 2.4%. Today’s data suggest that the MNB will stick with its stead, hawkish, monetary course for the foreseeable future. The Hungarian forint didn’t respond to the data and holds its ground near strongest HUF-levels since the summer of last year (EUR/HUF 393).
People familiar with the matter told Bloomberg that the Bank of Japan is of the view that it may be possible to raise the benchmark interest rate again this year regardless of domestic political instability, as economic conditions have developed in line with expectations. The US-Japan trade deal has also removed a key source of uncertainty. While an unchanged decision will be the outcome at the September central meeting, odds for a 25 bps rate hike to 0.75% in October (meeting with new quarterly forecasts) surged from 44% to 64%. Earlier today, Reuters reported that the BoJ is highly likely to trim purchases of 10- to 25-yr Japanese government bonds in its Q4 plan. The Japanese yen initially gained ground on the rate hike rumours with USD/JPY slipping from 147.30 to 146.30 before returning towards 146.80.
