• Today was expected to bring market interludium with investors looking forward to the key US payrolls report to be released tomorrow, the One Big Beautifull Bill Act (OBBBA) now being debated for approval in the US House of Congress and first trade agreements between the US and trading partners expected/hoped of to be struck before the July 9 deadline. However trading wasn’t as quite as one could have expected. The approval of the OBBBA in the Senate (admittedly with the thinnest majority possible), after recent bond rally apparently was a good reason for markets to again give some bigger weight to the rising probability of big unsustainable US deficit spending and even higher debt ratios. At the start of US dealings, US ST yields briefly dropped as the ADP job report indicated that the US private sector in June lost 33k jobs, the first negative reading since July 2020. The report temporarily made markets reconsider when the Fed would be able/forced to resume its easing cycle. However, the decline in yields was limited and short-lived. US yields are currently rising between 0.5 bps (2-y) and 7.0 bps (30-y). The German curve follows this broader move with yields rising between 1.5 bp (2-y) and +8.0 bps (30-y; 10-y +9.0 bps includes a benchmark change). Some dovish ECB members (Rehn, Centeno) mentioned the risk of inflation undershooting the target, but for now a wait-and-see approach remains the preferred line of communication. On FX markets, the euro this time doesn’t profit from the softer than expected ADP. ECB comments on a (too) fast rise of the single currency maybe caused a short-term breather on the recent EUR/USD rally. Even so, we still see few reason for a U-turn in the overall USD decline of the dollar (EUR/USD currently near 1.177). DXY also rebounds slightly but just below 97, the technical picture remains fragile going into tomorrow’s payrolls report. • Drama and tears in the UK House of Commons and on UK (bond & FX) markets. UK yields are jumping between 6 bps (2-y) and 20+ bps (30-y) as speculation is growing whether UK Chancellor of the Exchequer will be able to politically survive after the government scrapped deficit-reducing welfare spending cuts, making it impossible for the UK Chancellor to meet her self-imposed budget rules. It also consumes the room for an active growth supportive policy. At the Prime Minister’s questions in Parliament this afternoon, Starmer initially failed to explicitly support his Chancellor, who clearly turned emotional. Whatever her political fate, current developments are a high profile reminder of the fragility of UK public finances, even with some (market) reminiscences to the September 2022 Truss-Kwarteng bond sell-off. Sterling also shows ‘emotional weakness’ with EUR/GBP surpassing the 0.8650 area.
News & Views
• Head of the IMF’s European Department Alfred Kammer said the ECB should keep its main policy rate at the current 2% unless new shocks materially change the inflation outlook. Kammer said they are not seeing anything of such magnitude. What they do see instead are two-sided inflation risks, which warrants a cautious monetary approach. They also expect price pressures to be stronger next year than the ECB (1.9% vs 1.6%), in part due to a different view on energy prices. The IMF view contrasts with that of the market, which expects one more cut to 1.75% by the end of the year.
• The recently appointed Hungarian central bank (MNB) vice governor Zoltan Kurali was clear as crystal in an interview with news agency Reuters: as long as inflation exceeds the MNB’s tolerance band (3% + 1ppt), rate cuts are off the table. That hasn’t been the case since December 2024 and isn’t pencilled in in the June forecast for all of 2025 either. And even if it would in the near term, for example due to government price caps on food and forcing other sectors including telecom to forego planned fee hikes, Kurali said that there needs to be a sustained – not a single – return towards the 3% midpoint target. Evidence from earlier such caps furthermore suggests that it hits like a boomerang when companies are allowed to adjust prices again. Kurali blamed elevated inflation expectations for price pressures being too strong despite the economy stagnating. A relatively stable forint in the past few weeks should dampen inflation and inflation expectations, he added. EUR/HUF recently returned sub 400 for the first time since March.
Graphs
30-y UK gilt yields jumps 20 bps+ as fiscal (un)sustainability questions political fate of Chancellor Reeves.
EUR/GBP: sterling joins UK bond market sell-off
EUR/HUF holding near 400 barrier as MNB commits to a restrictive policy as long as inflation stays above the target band.
EuroStoxx 50: equities show resilience even as risk premia at the long end of the yields curves are rising again.
Table
Contacts
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