Sunset Market Commentary – ActionForex

Markets

Oil prices are correcting lower again today, with Brent crude testing the USD 80/bbl level for the first time since the Middle East conflict erupted in early March. Markets are still repositioning following the interim agreement reached between the US and Iran. We would caution against excessive optimism, as many issues still need to be resolved during what is reportedly a 60-day ceasefire extension. The fact that different versions of the agreement continue to circulate is not particularly reassuring. In terms of actual oil supply, it will likely take several weeks at a minimum before production and shipping flows recover meaningfully. Nevertheless, risk sentiment remains constructive for a second consecutive day, with the EuroStoxx 50 posting another record high, gaining 0.7%.

Yesterday’s rally on Wall Street has shifted into a lower gear, with the Nasdaq opening little changed. Dollar resilience is keeping EUR/USD contained around 1.1600, while DXY remains near 99.6. The yen continues to receive little support from the widely anticipated BoJ rate hike to 1.0%, with USD/JPY trading back above 160. The ongoing decline in energy prices is compressing inflation risk premia and particularly weighing on the long end of yield curves. German yields are lower by around 3bps in the 10- to 30-year sector, while short-term yields have broadly stabilized. Money markets continue to price in one additional ECB rate hike later this year.

A similar bull-flattening pattern is visible in both the US Treasury curve, where yields are down 1.2-3.0bps, and the UK gilt curve, where yields are lower by 0.4-2.8bps, in otherwise technically insignificant trading. Central banks in both the US and UK meet tomorrow and Thursday, respectively. The Bank of England is expected to leave rates unchanged, while the Federal Reserve under Kevin Warsh is expected to remove its dovish bias from the policy statement. Warsh has promised a regime change at the Fed, including changes to how the institution communicates. This could affect the frequency of press conferences, which under Jerome Powell took place after every meeting, the number of public appearances by policymakers, and the future of the dot plot, particularly the interest-rate projections. Warsh has also expressed a preference for alternative inflation measures, such as trimmed-mean inflation, to gauge underlying price trends. He has repeatedly criticized the size of the Fed’s balance sheet and favors a return to more traditional policy implementation through the policy rate. While such changes would take time to implement, markets are likely to focus on these issues during the press conference. Investors will also seek clues about Warsh’s personal policy bias. Having been absent from monetary policy debates for an extended period, his stance remains difficult to assess, although the prevailing market view still leans toward seeing him as relatively dovish.

News & Views

The German ZEW expectations index rose sharply in June, increasing by 20.7 points to 10.5. The assessment of the current economic situation deteriorated slightly, falling 3.2 points to -81.0. According to ZEW, “The ZEW Indicator returns to positive territory as financial market experts expect the Iran conflict to be nearing an end. This is likely to ease the massive pressure on energy prices and inflation, benefiting energy-intensive industries and households while strengthening domestic demand.” Improved expectations were recorded across several sectors, including automotive, chemicals, pharmaceuticals and mechanical engineering. Expectations for private demand also improved substantially. However, despite these gains, sentiment balances in most sectors remain negative. The services sector improved modestly, rising to 16.7 from 13.2, while construction weakened sharply, falling 15.2 points to -12.0. Eurozone expectations also improved significantly, rising 18.6 points to 9.5, although the assessment of current conditions remained deeply negative at -43.4.

The National Bank of Poland today released core inflation data for May. Recall that Poland’s statistical office had already reported softer-than-expected headline inflation, which fell by 0.3% m/m and slowed to 3.1% y/y. Core inflation excluding food and energy prices declined by 0.1% m/m and eased to 3.1% y/y. Inflation excluding administered prices fell by 0.4% m/m and slowed to 2.8% y/y from 2.9% previously. Trimmed-mean inflation stood at 3.3% y/y, while the monthly increase was limited to just 0.1%. The NBP targets inflation at 2.5% ±1 percentage point. In line with broader global market trends, Polish yields have fallen sharply in recent days as easing concerns over the Iran conflict and lower oil prices have reduced inflation fears.

At the June policy meeting, NBP Governor Glapinski indicated that policy rates were sufficiently high to stabilize inflation. Other Monetary Policy Council members have recently maintained a similarly cautious tone, with some suggesting a prolonged period of rate stability and others leaving open the possibility that the next move could eventually be a rate cut. The NBP policy rate currently stands at 3.75%. The PLN 2-year swap yield has declined from above 4.50% a week ago to around 4.03% currently. Meanwhile, the zloty continues to trade in a relatively tight range around EUR/PLN 4.25.