Inflation in Japan’s capital Tokyo marginally eased and slightly more than expected in July

Markets

EMU yield curves bear flattened yesterday. A solid EMU PMI and the ECB reconfirming a data‐dependent wait‐and‐ see modus caused markets to reconsider expectations on additional ECB easing. The July EMU composite PMI at 51.0 suggests economic resilience despite still lingering trade uncertainty. The overall EMU figure was also still pressured by a poor French performance. Growth momentum in Germany improves. The rest of Europe continues a solid expansion. Cost inflation is easing and so are prices rises for consumers. The ECB basically subscribed the message from the PMI’s. Inflation has returned to the 2% target and is expected to hold near that level in the foreseeable future, admittedly given an exceptionally high degree of uncertainty. At the press conference, ECB’s Lagarde said the ECB is in a good place to assess developments. She saw growth mostly as expected, maybe even a bit better. In particular the latter remark triggered a further upleg in EMU yields. German yields rose between 8.8 bps (2‐y) and 1.9 bps (30‐y). The market focus, at least temporarily shifted from fiscal sustainability to monetary policy considerations. Money markets now only see about a 65% chance of a ‘final’ 25 bps ECB rate cut EoY 2025. US yields initially also showed similar gains, supported by low weekly jobless claims, but mixed US PMI’s (manufacturing unexpectedly falling from 52.9 to 49.5, but services beating at 54.6 from 52.9) slowed the upward momentum. The US 2‐y yield added 3.6 bps. The 30‐y finished unchanged. On other markets, equities apparently had discounted the good news of the US‐Japan trade deal (and the anticipation of other ‘acceptable’ deals with other trading partners). The US S&P 500 (+0.1%) and the EuroStoxx 50 (+0.2%) closed off the intraday peak levels. On FX markets, the performance of the euro post PMI/ECB could have been stronger. A EUR/USD spike to the 1.1785/90 area could not be sustained. EUR/USD even closed modestly lower at 1.175. DXY gained modestly (97.38 from 97.2). Still the technical picture remains fragile. USD/JPY also rebound to close near 147. Sterling again underperformed after a disappointing UK PMI. EUR/GBP extensively tested the 0.87 barrier (close 0.8698).

Asian equity markets are falling prey to profit taking after recent trade‐driven rally. The dollar gains marginally. Later today, US durable goods orders data and German IFO sentiment probably will only be of intraday significance. Markets will continue to look out for more trade deals between the US and major trading partners (including EU) as the August 1 deadline is nearing fast. This might cause some consolidation for equities and the dollar going into the weekend. At the short end of the EMU yield curve, a firm bottom now is probably in place. More good news might cause MM to further price out the probability of a final ECB rate cut. UK June retail sales rebounded a below consensus 0.6% M/M after a sharp 2.9% decline in May. EUR/GBP tried to extend gains beyond 0.87.  

News and views

Inflation in Japan’s capital Tokyo marginally eased and slightly more than expected in July to remain among the fastest paces in recent decades barring the post‐pandemic surge. Both the headline and core (ex. food) gauge retreated from 3.1% to 2.9%. The conventional core measure (ex. food and energy) matched June’s 3.1% as did services inflation at 2.1%. The latter is key to the central bank to determine whether inflation is durable or not, via wage gains filtering through to this labour sensitive sector. This year’s shunto (spring labor wage negotiations) are likely to add upward pressure on (services) inflation. Today’s numbers  do not derail our expectations for further BoJ rate hikes later this year, though the bank is likely to skip July despite the US and Japan having struck a trade deal. Japanese yields and the yen nevertheless edge a tad lower this morning. USD/JPY hovers north of 147.

UK GfK consumer confidence deteriorated from ‐18 to ‐19 in July. While slightly better than the ‐20 anticipated, it features some poor underlying details. GfK attributed this month’s drop to mounting job losses and rising inflation. It added that the savings intentions subseries rose to 34, the highest level since November 2007. GfK said households were building “contingency funds”, amongst others due to fears for further tax hikes in the next October budget. The weak consumer survey comes after yesterday’s poor PMI business confidence indicators and could spell trouble for the UK economy going forward. EUR/GBP extends gains to north of 0.87 to trade the highest since the April 2 market mayhem.

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