KBC Sunset Market Commentary 14/07/2025 via Trader Talent

KBC Sunset

Monday, July 14, 2025

Daily Market Overview

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Markets

• The start of the new week was a copy-paste of last week’s. A surge in long-term Japanese bond yields weighed on other core bonds too. Japan’s 30-yr yield shot up another 11 bps to be just 3 bps away from the tenor’s record 3.2% of May this year. The driving force, just as last week, is investor concern about fiscal stimulus in the run-up and aftermath of this Sunday’s Upper House elections. Spillovers affect US Treasuries with the long end of the curve adding up to 4 bps at some point. The 30-year (4.98%) is closing in on the symbolically and technically important 5% barrier. President Trump’s renewed tariff threat vs Europe (and others, including Mexico) towards the end of last week could be lingering as well in the form of increasing inflation expectations. That’s what dragged the long end of the curve on Friday anyway. Short-term yields in the US add between 1.2-1.7 bps. The bear steepening also shows up on European soil. Swap rates in the region rise up to 2.7 bps, pushing the 30-yr maturity to a new 1.5 year high (2.88%). Gilts slightly outperform today, lead by the front end. This came after Bailey highlighted the potential for bigger rate cuts in an interview with The Times yesterday. The Bank of England governor stuck with the official guidance of going “gradual and careful” due to inflation still being above target. But he also said that “if we saw the slack opening up much more quickly, that would lead us to a different conclusion.” Bailey referred to an economy growing below potential and businesses adjusting employment and offering lower pay rises, amongst others due to this year’s increase of the businesses national insurance contribution. UK yields lose around 2.9-4 bps in the 2-5 year bucket. UK money markets are upping bets for more than two (quarterly) remaining rate cuts this year.

• The aforementioned weighs on the pound sterling for a second day straight after Friday’s surprisingly weak monthly GDP and industrial production prints. EUR/GBP rallies to 0.867, the highest level since mid-April. The 0.874 level hit intraday back then serves as a first resistance. Major currencies such as the euro and the dollar trade more or less in balance, adding to evidence that markets are not taking Trump and his tariff threats too seriously. EUR/USD at around 1.1686 tries to keep the upward sloping trend line since early March in tact. The 8-day bottoming out in DXY (mostly a JPY story) is running into resistance near the 98 barrier, which coincides with the upper bound of a short-term downward sloping trend channel.

News & Views

• The German Bundesbank published a study looking into the sustained decline in German export market shares. They haven been contracting since 2017 and increasingly falling behind those of other advanced economies since 2021. More than three-quarters of the export market share losses between 2021 and 2023 were due to the deterioration in German exporters’ competitiveness. This points to fundamental structural problems. To this end, incentives to work should be strengthened, barriers to the immigration of skilled workers and unnecessary red tape should be cut back, tax incentives for private investment increased, and conditions for start-ups and research and development improved, to name a few examples. In addition, weak global demand for motor vehicles, in particular, dampened the development of German export market shares through product-specific demand effects. Energy price increases and supply chain disruptions also played a significant role. In separate comments, German Chancellor Merz today said that the proposed 30% reciprocal tariffs from the US on EU goods would hit the export industry to the core. Merz is really committed to finding a trade deal by the August 1 deadline.

• People familiar with the matter indicate that the Bank of Japan will likely consider raising its core CPI forecast for fiscal year 2025 from the current 2.2% after food inflation proved more sticky than expected in the previous quarterly update. Higher oil prices are another reason for increasing inflation forecasts. The next update will be released on July 31st. The BoJ can likely retain its view that Japan’s price trend will be consistent with its sustainable inflation goal in the second half of the three-year outlook period, bolstering the case for eventual further rate hikes. The central bank’s quarterly household opinion survey showed households expecting prices to rise by an average 12.8% a year from now, highest since September 2006 and by an average of 9.9% over the next five years, the highest on record.