The economic calendar includes US PPIs and weekly Jobless Claims

Markets

Slightly lower‐than‐expected US inflation (May) and a decent $39bn 10‐yr auction yesterday caused UST outperformance over Bunds. Yields dropped between 1 and 7.2 bps in a bull steepening move. The US 2‐yr yield called off its adventure north of 4% once again. The next Fed rate cut remains fully priced in for October but the September odds rose from 65% to more than 80%. Expectations for June haven’t budged with the status quo the near‐certain outcome. US VP Vance in the wake of the CPI release called the Fed’s sideline‐approach monetary malpractice while president Trump again argued for a full percentage point cut. European rates were on the rise, particularly at the long end of the curve, before the inflation numbers broke their momentum to a certain extent. Net daily changes varied between flat (2‐yr) and +3.5 bps (30‐yr) for Germany. The US dollar fell with EUR/USD testing but eventually closing just shy of 1.15. It was just a matter of time though. The pair is moving ahead in Asian dealings, filling bids at 1.152 currently. The April/multi‐year high of 1.1573 is only a whisker away. DXY is headed for the 98 April low in a mirror move. UK Chancellor Reeves’ spending review outlined three years of expenditures to build roads, railways, houses and energy projects but that didn’t inspire sterling bulls. The pound extended the drop that was instigated by Tuesday’s labour market report. EUR/GBP rose to its highest level in a month at around 0.848.  

The economic calendar contains second‐tier data only, including US PPIs and weekly jobless claims. CPIs yesterday showed no impact from US tariffs yet but that could be different for the more upstream producer prices. It should in theory offer a floor for (front‐end) yields. Long‐term bond markets are watching tonight’s $22bn 30‐yr auction closely. It’s by far the most tricky sale this week and we wouldn’t draw any premature conclusions from the decent one on Tuesday (3‐yr, short term) and yesterday (10‐yr, the most wanted tenor on the curve). Some major funds have already declared a buyers’ strike. We hold a bearish bias on the US dollar with the technical picture increasingly looking worse. There remains a lot of US‐grown uncertainty, first and foremost on trade. US Treasury Secretary Bessent before Congress yesterday hinted at an extension to the July 9 deadline (after which Liberation Day tariffs kick in again) if countries are negotiating in good faith. But president Trump overnight threatened to set unilateral tariff rates within two weeks, ahead of July 9. EUR/USD 1.1573 is the final meaningful hurdle for a full return to the 2021 high at 1.2349. Oil prices in commodity markets are worth following closely. Tensions between the US and Iran are rising. A 60‐day deadline set by Trump to strike a nuclear deal expires today. The US’ warning to consider military options if diplomacy fails was met with a retaliatory tone by Iran. Brent crude shot up $4 on the barrel intraday before closing just south of $70, still the highest since the Liberation Day crash.

News and views

Executive Director of Markets at the Bank of England, Vicky Saporta, indicated that banks should prepare for using the BOE’s routine liquidity facilities for liquidity management and not just as a backstop. These facilities aside from a short‐term repo also contain a long‐term (six months) repo facility. The BoE raised the weekly amount available for the term repo facility to £35 bln from £25 bln and total liquidity to be provided by the facility could go as high a £840 bln. The need for banks to switch to more repo funding comes as the BoE’s quantitative tightening (not reinvesting existing bonds and active sales) is reducing liquidity with markets gradually returning to the ‘preferred minimum range of reserves’. According to Saporta, the BoE might reach this level as soon as the second quarter of next year. "Firms must now fully consider the changing liquidity environment and their plans to source reserves within that," Saporta is quoted.

The government of Polish Prime Minister Tusk yesterday survived a confidence vote in Parliament (243‐210). Tusk asked for the vote after the candidate of the Polish opposition, Karol Nawrocki, at the June 1 election became president. The vote is seen reconfirming the mandate of the new government and as well as the support of the coalition partners who are internally divided on the execution of the government program. In attempt of a new start, Tusk also announced a cabinet reshuffle. Even so, It is still expected that it will remain a bumpy road for the government going into the next parliamentary elections that are scheduled for late 2027. The zloty yesterday nevertheless rebounded to currently again trade near EURPLN 4.25.

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