Energy and risk markets remain in the driver’s seat
Markets
US stock markets rallied up 2.26% (Nasdaq) yesterday with AI/tech names leading the advance. The Nasdaq even tested the all-time high reached early June. The likes of the S&P 500 and EuroStoxx50 recovered up to 1.5%. Positive risk vibes and lower energy prices supported consolidation on bond markets following the past month’s heavy losses. European yield curves bull steepened. The front end (2-yr) ceded up to 7 bps as markets scaled back aggressive ECB tightening bets. Discounting a 3.5% ECB peak rate at the moment seems somewhat overdone even if the central bank clearly sticks with a hawkish/tightening stance. ECB chief economist Lane today warned for the second wave of prices rises, not only in oil but also in gas. The central bank believes this second wave should lead to higher and more persistent inflation, before a decline toward its 2% target from mid-2027 onwards. Lane in first instance expects pressure on food prices, on energy in the broader sense including electricity, and on goods in general. He remains rather optimistic on the EMU economy’s resilience with growth expected to grow at a steady but moderate pace provided the shock does not intensify. The US yield curve bull flattened with yield changes at the front end of the curve close to zero and the 10-30-yr bucket dropping 4 to 5 bps. Several Fed governors stuck with a hawkish tone. Chicago Fed Goolsbee warned for more and persistent supply shocks defining the central bank’s reaction function. He said the current volatile environment makes that the logic of “looking through” such shocks no longer hold. Goolsbee said the Fed’s response to supply shocks doesn’t need to be as aggressive to overheating demand, but it won’t be painless either. St-Louis Fed Musalem believes that additional rate increases may be required to achieve the inflation goal and that monetary policy may still be stimulating the economy even after last week’s hike. He thinks that the Fed doesn’t need to break the labour market to hit the 2% inflation mark, suggesting no need to move into restrictive territory. It matches with Fed Chair Warsh’s narrative of removing a dose of accommodation. Boston Fed Collins didn’t see the inflation progress she was hoping to see and penciled in a second, but final, hike for later this year. In FX space, the dollar showed resilience in a positive risk and lower energy context. EUR/USD closed at 1.1465 from a start at 1.1483. USD/JPY continues its upward drift with the pair changing hands around 157.50 with Japanese markets still closed. Last Friday, the BoJ/MoF conducted rate checks when the pair slipped towards 158.
Today’s eco calendar only contains second-tier eco data. An avalanche of central bank speakers is unlikely to shift the (hawkish) debate. Energy and risk markets remain in the driver’s seat in the build-up to a potential meeting between the US and Iranian president later this week and Thursday’s Trump/Xi Jinping meeting. We keep a close eye on the French-swapspread as well with the government expected to announce more measures to support affordability in light of surging energy prices. Les Echos also reports on a letter from French President Macron to EC President von der Leyen to take immediate action to lower energy prices.
News and views
The US proposed a $5bn repair fund for damaged critical infrastructure across the Middle East, the Wall Street Journal and later Bloomberg reported. The investments under the so-called Partnership for Allied Construction & Trust would focus on four types of projects: investments to help bypass the Strait of Hormuz, restoration of energy flows and critical material exports, better protects assets against future attacks and rebuilding essential domestic infrastructure and import flows. In return for these investments, the US would seek a matching $5bn contribution from eight Middle Eastern partners. The proposal, led by the US Development Finance Corporation, has yet to be approved by the countries involved.
Germany’s Handelsblatt reported yesterday that the country’s leading economic institutes have raised their forecasts for growth this year and the next. Essen’s RWI, Munich’s Ifo, Kiel’s IfW, Halle’s IWH and Berlin’s DIW are now projecting an expansion of 1.3% in 2026, more than double the 0.6% expected previously. The 2027 forecast was raised to 1.1% from 0.9%. Some of the institutes yesterday did warn for the recent state elections results, saying they could lead to political paralysis or the coalition government watering down growth reforms.
Author
KBC Market Research Desk
KBC Bank
KBC's Market Research Desk publishes a number of short-term reports.
