KBC Sunset Market Commentary 08/07/2025 via Trader Talent

KBC Sunset

Tuesday, July 8, 2025

Daily Market Overview

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Markets

• Japanese yields for a second day straight surged around 10 bps at the very long end of the curve. The 30-year bond yield is now up 20 bps since the start of the new week and just 13 bps shy of the record-high (3.2%) seen mid-May. Investors are turning nervous ahead of the July 20 elections in the Japanese Upper House of parliament. PM Ishiba is already running a minority government after snap elections last year and his approval rates are low (which by the way also helps explain Japan’s staunch stance in the US trade talks). Losing the Upper House elections could further strip the ruling coalition of its powers. To win voters over, markets fear another dose of stimulus at a time of already unsustainable public finances. The Japanese case serves as a reminder for the rest of the world, be it the UK, US or Europe and is already overshadowing the trade theme again. All three regions see the long end of the curve underperforming, the UK taking the lead. The fiscal situation in the country is getting a lot of market attention with the October budget being the next key event. Chancellor Reeves’ faces a potential £30bn hole that investors fear can only be found by changing (ie. loosen) the set of self-imposed fiscal rules. And as it happened, the UK’s fiscal watchdog (Office for Budget Responsibility) today flagged the “unsustainable” outlook in its annual fiscal risk report. It warned for a rapidly rising debt burden amid an aging population pushing up health care and pension spending and mounting climate and geopolitical risks. Adding to the problem of supply is waning demand from pension schemes. The 30-yr gilt yield adds 7 bps today with the 1998 high seen in May now just 20 basis points away. US rates add between 1.4 and 4.5 bps in a bear steepener. The 30-yr, currently 4.96%, is suddenly aiming for 5% again. And in Germany, raters add 5+ bps with the 30-yr tenor being 10 bps shy of a 14-yr high. The rest of the curve also shifts a couple of basis points higher too though. This could be the result of the EU and US potentially closing in on a trade agreement. Politico reported yesterday of a US proposal for a universal 10% (ie the floor) tariff with some exceptions here and there. Such a deal would be on the better side of expectations. It also lowers (or even removes) the already questionable need for a last ECB rate cut markets are currently pricing in, hence the near-parallel curve shift today. In any case, the general extension of the tariff deadline from July 9 to August 1 (USTS Bessent last week referred to an even later date on Labour Day, Sep 1) raises chances of finding common ground one way or another. The chair of the council of economic advisors, Miran, said there could be more trade deals by the end of the week.
• The Japanese yen underperforms major global peers on currency markets. Japan was slapped by a 25% tariff as president Trump raises the pressure on a country that dug in for electoral motives. USD/JPY marches higher towards 146.65. EUR/JPY moves beyond a final resistance at 171.56 ahead of the July 2024 record high (175.43). The Aussie dollar is on the other side of the FX spectrum. AUD/USD rebounds to 0.654. The RBA unexpectedly stood pat on rates this morning (3.85%) over the risk that some CPI components may be above-forecast. Governor Bullock did say it is a matter about timing, not direction. An August cut is almost fully priced in. In between we find some muted moves in EUR/USD (unchanged around 1.1715). Rising risk premia weigh on sterling, pushing EUR/GBP higher north of 0.86.

News & Views

• CPI consumer price inflation in Hungary in June rose 0.1% M/M and 4.6% Y/Y (was 0.2% and 4.4% in May). The outcome was close to expectations. The Hungarian central bank’s (MNB) core inflation estimate fell from 4.8% Y/Y to 4.4%. The bank indicated that both headline and core inflation were in line with its June inflation forecast. The increase was primarily due fuel prices as they decreased to a lesser extent than in the previous month. The MNB also indicated that price and margin restriction measures from the government had a significant inflation-reducing effect. The greatest effect was due to the price margin cap on food prices but the effect on household goods, which came into effect in May, also fully appeared. In addition, voluntary price restrictions by banks and telecoms are also holding down inflation. Annual inflation of tradables slowed to 2.5% from 2.9%. Annual inflation of market services was 0.4% M/M but still rose at 6.7% Y/Y. With inflation still holding well above the 3.0% +/- 1.0% target range of the MNB, today’s data justify the MNB indicating that policy will have to remain at the current restrictive level (6.5%) for some time to come. The forint trades little changed just below the EUR/HUF 400 level.