Minutes of the July FOMC meeting serves as one of today’s economic highlights

Markets

Bear steepening turned into bear flattening in Europe yesterday. Daily changes on the German yield curve ranged between +2.4 bps (30-yr) and +5 bps (2-yr). EU swap rates added 0.9 bps (30-yr) to 4.5 bps (2-yr). The US/Iran stalemate and higher energy prices offer a first explanation. Both parties don’t seem to be on speaking terms with their Memorandum of Understanding, signed in June and including a truce extension to reach a lasting peace deal within 60 days, expiring on Monday. Brent crude climbed above $91/b with the reference European gas contract (Dutch TTF) hitting €64/MWh for the first time since March 19. First public ECB comments since July 31st added to the intraday underperformance at the front end of the curve. Chief economist Lane warned that EMU inflation will hover around 3% probably for the rest of this year. Further upward pressure is expected in 2027 coming from food inflation. The European economy is doing okay-ish with Lane stressing a clear priority to curb price pressures and avoid them staying too high for too long. For EMU money markets, it was a validation of their clear conviction that the central bank will raise its policy rate a second time this year at the next, September 10, policy meeting. As long as energy prices don’t spiral out of control, they stick to a gradual tightening path with the market implied probability of a third move come December currently reaching 70%. It is fully discounted by the March 2027 meeting. ECB President Lagarde today participates in a panel discussion titled “Global Economic Outlook” at the WEF’s International Business Council. Together with Minutes of the July FOMC meeting, it serves as one of today’s economic highlights. Her comments will likely be in line with the ones from Lane yesterday. FOMC Minutes could be a hawkish read as more Fed governors than the three official dissenters probably backed a rate hike. However, market momentum to fully embrace them going into the September 17 meeting dwindled last week following weak payrolls and tame inflation data.

Yesterday’s front end interest rate support failed to trigger a second test of the EUR/USD 1.16 resistance area. Higher oil prices and weaker risk sentiment offered some balance. European stock markets corrected up to 1% with key US indices closing up to 1.33% (Nasdaq) lower. From a technical point of view, there’s room for a more pronounced move lower. The Iran narrative and rising real rates at the (very) long end of the curve offer short term headwinds for overall risk sentiment with indices near all-time highs. UK July CPI figures printed nearly completely in line with consensus this morning (0.3% M/M & 2.9% Y/Y; core 2.6% Y/Y; services 3.4% Y/Y) and fail to inspire UK markets.

News and views

The Canadian dollar strengthened vs its US counterpart to USD/CAD 1.388 this morning after the Trump administration delayed a 50% tariff that was set to go into effect mere hours later. The US president proclaimed that both countries have reached a deal, “subject to the finalization of documents”. The tariff threat is still there but the deadline was moved by three days to allow for further negotiations. Trump announced the 50% levy in late July in a response to Canadian retaliatory measures against the flurry of tariffs the US had introduced last year. Particularly provincial bans on US alcohol sales and counter-tariffs against US-made cars and trucks triggered US frustration.

The Australian central bank’s n° 2 warned that inflation (3.8% in Q2) is still too high. Deputy governor Hauser said that while policymakers last week concluded that the policy rate level (4.35%) is fine where it is for now, worries about the outlook remain. Should upside inflation risks crystalize, rates will have to be raised again, Hauser said. Some of the upward price pressures stem from the conflict in the Middle East but some also has domestic roots in the form of capacity pressures. Hauser also noted that house prices have come down in recent months but that even after these recent declines, they remain about 50% higher than before the pandemic. RBA assistant governor Kent last week suggested that these softer housing market conditions take away some of the need for monetary policy to constrain the economy. Australian money markets currently do not price in any further hikes in the foreseeable future. The market implied probability for an en end-of-year hike stands at 60%.

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