Markets
US retail sales made headlines today. It recorded slightly stronger data than expected when considering the upward revisions to the already strong month of May. Core trading value increased by 0.2%. This is actually not bad when taking the series into account It is not adjusted for price fluctuations. In fact, sales from gasoline stations weighed on the overall figure with a -5.3% decline, at least partially reflecting the significant decline in crude oil last month. The core measure that excludes automobile and gas sales rose 0.4% after a revised 0.8% rise in May, while the private consumption index used in GDP calculations (control group) added 0.5% (0.8% versus the previous month). Seven of the 13 categories rose, with significant increases in sporting goods, automobile, parts and online sales. As for the eating and drinking category, which is the only category related to services, it increased by only 0.1%.
Although they were good, if not strong, it was not retail sales that drove today’s market movements. I did geopolitics. President Trump warned Iran earlier this week that the United States would begin bombing civilian infrastructure including bridges and power plants if it did not return to the negotiating table. Iran has now reportedly instructed its Houthi allies in Yemen to close the Bab al-Mandab Strait if the United States follows through. The strait connects the Red Sea to the Indian Ocean via the Gulf of Aden, and represents the transit of an estimated 10% of global oil supplies. This share may have increased since the Iran war. The market reaction follows a well-known pattern. Oil prices rebounded from intraday lows (Brent crude near $86), and gas prices did the same to reach a new multi-month high (€55.3/MWh). Selling underlying bonds. The position of the front end of the curve is changed in the increasing function The central bank is tightening its bets. For the ECB, markets are assuming an additional 45 basis points rise this year. The Federal Reserve is expected to raise by 28 basis points and the Bank of England by 40 basis points. Two-year bond yields rose by 3 to 3.5 basis points in the US and Europe (where their 2026 highs are still under attack) and about 5 basis points in the UK. The long end is taking a hit from rising inflation expectations and risk premia. The American bucket for 10-30 years adds 4 basis points. European swap rates rose by about 3 basis points in the same sector. The 30-year rate was at one point less than a basis point below a new 15-year high. The US dollar maintained a slight upper hand against most of its counterparts in the forex market. The EUR/USD pair is giving up some of yesterday’s gains to trade around the 1.145 level. The DXY index rises towards 100.6. Sterling’s strong momentum yesterday has waned today. The Financial Times reported that Mahmoud of the more fiscally conservative Labor Party would be appointed as the new chancellor in place of Miliband. This eased some concerns about the UK’s fiscal sustainability, leading to the EUR/GBP pair breaking below the 0.85 level towards support at 0.8468. The latter is doing its job at present. GBP/USD is back at a two-month high of 1.354 to 1.351 currently. Huge profits and strong expectations from leading semiconductor company TSMC have failed to inspire the AI/technology sector, on the contrary. US stock markets opened lower with the Nasdaq down nearly 1% as questions persist over the profitability of huge capital investments.
News and opinions
The National Bank of Poland published a set of core inflation numbers today. The core CPI excluding food and energy prices rose 0.3% month-on-month with the year-on-year change hovering around 3% for the third month in a row. This is above the midpoint of 2.5% for the 1.5% to 3.5% tolerance range. Other key metrics that respectively exclude more volatile prices or prices that were reduced by 15% mean that both slowed from 3.3% to 2.8% year-on-year. Inflation excluding quoted prices fell by 0.6% m/m to 2.1% y/y (from 2.8%). Today’s data was printed close to consensus, and left no impact on the markets. Polish financial markets expect interest rates to stabilize over the next 12 months amid mixed messages from central bank members Waiting for the result of the summer inflation readings in light of the end of the financial measures that determine the ceiling on energy bills.
The minutes of the Swiss National Bank’s June meeting confirmed that monetary policy (0% interest rate) continues to have an expansionary effect. Real interest rates are currently negative and below their long-run equilibrium. Financial markets are pinning a 40% chance of raising interest rates at the last meeting of the Swiss Central Bank this year (December). Swiss Inflation remains stuck in the lower half of the 0% to 2% target range. With the central bank describing the impact of the energy shock as largely temporary. The Swiss National Bank (SNB) meeting minutes also showed relief that the weaker franc is contributing to easier monetary conditions (EUR/CHF rate is 0.9250 now vs. 0.90 in March). In the first quarter, the SNB was still resisting the strength of the Swiss franc through foreign currency purchases, part of which it managed to reverse in May.
