ECB plans geopolitical stress test
Markets
The devil of yesterday’s June US CPI inflation report was in the details. Headline and core CPI rose by 0.3% M/M and 0.2% M/M respectively to be up 2.7% Y/Y (from 2.4%) and 2.9% Y/Y (from 2.8%) respectively. Those outcomes were almost bang in line with consensus estimates, explaining the initial attempt to rally by US Treasuries. Details showed a relatively small increase in shelter prices (0.2% M/M) which carry the biggest weight in CPI calculations and play a less dominant role in PCE deflators to be published at the end of the month. Several goods categories like household furnishings, video and audio products and toy prices recorded monthly price rises ranging between +1% and +1.8% and do suggest some early pass‐through of tariffs. Bearing in mind that the overall tariff level will rise after the August 1 deadline, it made investors rethink the Pavlov‐reaction after the CPI report made initial headlines. Daily changes on the US yield curve ranged between +4.1 bps and +5.5 bps with the belly of the curve underperforming the wings. The US 30‐yr yield closed above the psychological 5% mark for only the third time since the autumn of 2023. Technical resistance stands at 5.15% (YtD high) and 5.18% (2023 top) respectively. An (uncontrolled) sell‐off in (core) bonds with very long tenors poses a significant threat to overall market stability especially once trading volumes thin early August. The implied Fed rate path for this year didn’t change that much, suggesting that the move was driven by a combination of higher inflation expectations and a higher Fed terminal rate. Dallas Fed president Logan overnight presented a base case in which monetary policy needs to hold tight for a while longer to bring inflation sustainably back to target. During this period, she believes that maximum employment can be sustained even with a modestly restrictive policy. Logan is ready to adapt her view fairly soon if a combination of softer inflation and a weakening labour market calls for it. Yesterday’s move in US Treasuries helped the dollar’s bottoming out process in FX space. EUR/USD closed at 1.1601 from a start at 1.1664. The trade‐weighted greenback (DXY) rallied from 98.12 to 98.62 with the June high (99.47) being first resistance.
US President Trump overnight suggested that sectoral tariffs on pharmaceuticals and on semiconductors will likely be imposed as soon as the end of the month. He suggested a timeline which starts with a low tariff, given companies a year or so to react/move to the US before making it a very high tariff (for pharma; 200%?!). These sectoral levies will hurt European risk sentiment at the onset of trading. US producer price inflation are on tap this afternoon and risks adding to yesterday’s sell‐off in US Treasuries. UK June inflation this morning rose more than expected for headline (3.6% Y/Y), core (3.7% Y/Y) and services inflation (4.7% Y/Y). Sterling in a first reaction fails to really profit in light of the recent repositioning on rather dovish comments by BoE governor Bailey (slack opening up in economy, labour market weakening, potential impact on BoE’s reaction function).
News and views
In an appearance before European Parliament, Claudia Buch, head of the ECB’s Supervisory Board, indicated that the next ECB stress test will check the resilience of bank’s solvency for geopolitical risk scenarios. “In the 2026 thematic stress test exercise, we will follow up on this year’s stress test by asking banks to assess which firm‐specific geopolitical risk scenarios could severely impact their solvency”. The ECB holds a so‐called thematical stress tests every other year. The previous thematical test in 2024 was on cyber security. The exercise will come in the form of a so‐called reverse stress test. In this procedure regulators will determine a specific outcome for the level of banks’ solvency, and then ask them to put in place scenario’s that might lead to hitting these levels.
US President Trump announced that the US reached a trade agreement with Indonesia. In this agreement, the US will impose a 19% tariff on imports from the country. The country earlier was threatened with a 32% levy from August 1st in one of the letters Trump sent to trading partners. In this respect Indonesia is the first country that succeeded to reduce the letter tariff with a trade agreement. According to the US President, Indonesia will erase all duties on Indonesian imports. Trump also said the country agreed to buy $19bn of US goods, including $15bn of US energy products and $4.5bn of US agricultural products. The county also committed to buying 50 Boeing jets. Trump suggested that another two or three trade deals would be made by the August 1st deadline, with India apparently in pole‐position.
Author
KBC Market Research Desk
KBC Bank
