Sunset Market Commentary

Markets

European markets were captured in an indecisive trading pattern yesterday, in the wake of the surprise win of the left alliance in the French elections. Spreads of France (and other peripheral EMU countries) initially tightened marginally as none of the extreme parties secured a majority to implement uncontrolled spending. However, from a longer term perspevtive, the fiscal situation in most semi-core and peripheral countries remains challenging. Today most intra-EMU spreads (including of France) again (partially) reversed yesterday’s tentative narrowing (France +2 bps vs Bunds, Spain & Belgium also +2 bps) . The European fiscal premium is here to stay (cf infra). In technical trading, German yields added between 1.5 bps (2-y) and 2.5 bps (30-y). At least for now, investors stay cautious to push for a more aggressive pricing on further ECB interest rate cuts (September not yet fully discounted). US markets in the meantime almost fully discount two 25 bps Fed rate cuts toward the end of the year in the wake of recent softer price and labour market data. In this respect markets at least expect some opening from Fed Chair Powell at the hearing before the Senate Banking Committee that recent data, if confirmed, might give the Fed more confidence to cut rates earlier than what was guided by the June Fed dots (one 25 bps cut this year, four next year). At the time of writing, no text of Powell’s appearance is available yet. US yields are are rising marginally (

Very little to report on the major FX cross rates. The dollar gains marginally (DXY 105.1). EUR/USD fails to buid on recent constructive momentum (EUR/USD 1.082). The yen again weakens north of USD/JPY 161 (1). Sterling (Cable 1.281) also takes a breather ahead of key resistance (1.2860/94).

News & Views

Hungarian inflation came in slower than expected in June. Prices were unchanged on a monthly basis, missing the bar for a 0.2% rise. The y/y figure as a result eased from 4% to 3.7% vs 3.9% consensus, thereby revisiting the upper range of the central bank’s 3% +/- 1 ppts target. Declining prices for food (-0.3% m/m) and for electricity, gas and other fuels (-2.3% m/m) were compensated by higher prices for alcoholic beverages and tobacco (+1%) and services (+1%). Core inflation across all gauges is still above target, ranging from 4.1% to 5.6%. High core CPI is one of the Hungarian central bank’s key worries, along with fears that sharp (real) wage gains could reignite already elevated inflation again. It downshifted the cutting pace to 25 bps (to 7%) last month and hinted it entered a different monetary phase where it won’t cut rates at each and every next meeting. The bumpy inflation path, delayed Fed & slow ECB cuts as well as a generally weak forint mean the central bank has to tread cautiously. Hungarian swap yields do drop around 7.5 bps in the wake of today’s release. Money markets assume around three more 25 bps cuts by the end of the year, in line with the KBC scenario. EUR/HUF is hovering around 395.

Rating agency Moody’s said the outcome of the French parliamentary elections is a negative for the country’s credit rating. “In light of the constraints that any future government faces, we are unlikely to see expenditure-based fiscal consolidation in 2025,” Moody’s said in a note referring to the fiscal implications of a hung parliament. Further tax hikes are also unlikely, it added, noting that the country’s tax-to-GDP is already the highest in the OECD. France enjoys a Aa2 rating with a stable outlook at Moody’s. In its first comment since Labour’s landslide victory in the UK, rating agency S&P pointed out that stronger economic growth is key to stabilize the country’s rising public debt. S&P forecasts the UK’s debt ratio to hit 100% ratio next year and expects the new government to uphold a commitment to improve public finances. The country’s AA rating with a stable outlook at S&P is one notch higher than at rating peers Fitch (AA-) and Moody’s (Aa3-).