KBC Sunset Market Commentary 03/07/2025 via Trader Talent

KBC Sunset

Thursday, July 3, 2025

Daily Market Overview

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Markets

• Odds for a July Fed rate cut fell back to 0% (from 20%) after a solid June payrolls reports. Anticipation had been building after a slight change of tone in Fed comments, given lack of evidence of tarri(n)flationary pressure (so far) and softening activity data. Net job growth rose by 147k in June (vs 106k consensus) with a cumulative 16k upward revision to the previous two month’s numbers. Overall government jobs contributed strongly (+73k; on a state and local, not federal, level). The private sector’s contribution (+74k) is the lowest since October of last year. The unemployment rate fell back from 4.2% to 4.1% despite a lower labour force participation rate (62.3% from 62.4%) which suggest people leaving the labour market (less job seekers than employment gains in household survey) and takes some shine of today’s numbers. Average wage growth slowed more than expected (0.2% M/M & 3.7% Y/Y from 0.4% M/M & 3.8% Y/Y). US Treasuries sold off after payrolls with the yield curve bear flattening. US yields add 9.1 bps (2-yr) to 4.1 bps (30-yr). The rising interest rate differential with Europe gives the dollar some reprieve with EUR/USD falling back from the 1.18 area to currently 1.1750. Weekly jobless claims more or less stabilized at 233k with the ISM services index to be released as we finish this report. Whatever the outcome, it won’t alter the post-payrolls vibe. We keep a closer eye at US Congress where the House might soon switch to a final vote on President Trump’s One Big Beautiful Bill Act. Passing the multiyear budget framework which significantly raises the debt limit could weigh additionally on Treasuries as investors position for the long weekend. US markets are closed for Independence Day tomorrow.
• One day after Westminster drama, UK PM Starmer and Chancellor Reeves tried to pull themselves together. Starmer by saying his Finance Minister will be in her role for a very long time to come. Reeves by absolutely committing to her fiscal rule that current spending must be matched by tax receipts, even as she has to restore her £10bn buffer. The act of support and commitment helped undo part of yesterday’s sell-off in UK Gilts. UK yields lose 2 bps to 5.4 bps (30-yr) today but of course compared with a 20 bps increase yesterday. Markets are aware that the next battle (scraping two-child cap on welfare payments to larger families) arrives soon and could again trigger internal Labour rebellion forcing the government’s hand. The Autumn Budget is another key event that will keep Gilt markets on edge. EUR/GBP drops back from 0.8650 to 0.8620 today after gaining almost one big figure yesterday.

News & Views

• Swiss inflation returned into positive territory in June rising 0.2% M/M and 0.1% Y/Y (from -0.1% Y/Y in May). Core inflation (ex-fresh and seasonal products, fuel and energy) also rose slightly from 0.5 Y/Y to 0.6% Y/Y. Looking at the structure of the CPI development, prices of domestic products rose 0.2% M/M and 0.7% Y/Y. Prices of imported goods were unchanged M/M but declined 1.9% Y/Y. Goods and services prices (respectively -0.1% M/M and -1.6% Y/Y; 0.3% M/M and 1.1% Y/Y) showed a similar divide, mirroring the impact of the strong franc on imported inflation. The ‘rebound’ in Swiss inflation comes as the Swiss National Bank (SNB) last month cut the policy rate by 0.25% back to zero. At that time the SNB forecasted that inflation could hold with the 0%-2% range of price stability over the policy horizon (0.2% on average this year). It is prepared to adjust policy as necessary, but highlighted side-effects of a negative policy rate. In this respect, today’s data might bring some relieve. The Swiss franc eases marginally ( EUR/CHF 0.935). Money markets see a 50%-probability of a return to negative rates by year-end.
• Japan’s largest group of labour unions (Rengo) today announced that it secured an average wage rise of 5.25% in this year’s annual wage negotiations. It marks the biggest rise in 34 years. While slightly lower than the preliminary tally indicated in March (5.46%), it was still substantially higher than the average pay rise of 5.1% reached last year and 3.58% in 2023. Rengo executives indicated that they this year focused on higher wages at smaller companies, representing about 70% of the employees. Wage increases for this category were up 4.65% from 4.45%, further narrowing gap with the hikes at larger corporations. However, smaller companies often have less pricing power to pass through higher costs. Despite bigger increases, wages are still eroded by 2%+ inflation which complicates the government and the BOJ’s aim to install a positive spiral of higher real wages supporting domestic consumption. Even so, the wage data might lay to groundwork for the BoJ to consider further policy normalization once the uncertainty due to the trade tensions subsides later this year.