Markets
Wall Street resumed trading after a long weekend on a positive note. The Nasdaq advanced by over 1 %, while the Dow Jones recovered from early weakness to close at a new record high. Treasury yields experienced volatile trading, ending with modest changes ranging from a 0.1‑bps rise on the 30‑year note to a 3.1‑bps decline on the 3‑year note. The July Services ISM index came in at a solid 54, down slightly from June’s 54.5, but the breakdown indicated continued growth momentum for the month ahead, with new orders rising to 55.1. The employment component posted its first reading above 50 since February. The prices‑paid index fell from a post‑war peak of 71.3 to 67.7. During a panel discussion, Federal Reserve Governor Christopher Waller, alongside ECB Executive Board member Philip Schnabel, observed that the balance of risks had shifted from the labor market to inflation. “That changes how you might want to think about policy,” he noted. Money‑market pricing now reflects a full Fed rate hike by year‑end. ECB’s Schnabel cautioned that despite lower oil prices, the market is not back to pre‑war conditions, citing persistent higher oil price expectations and gas prices roughly 40 % above their pre‑war level. He warned of ongoing pipeline and supply‑chain bottlenecks and the need to rebuild energy inventories, though other officials—such as Belgium’s central bank governor, Didier Wunsch—appeared more conciliatory. Wunsch did not rule out another rate increase but suggested that without clear second‑round effects and with benign wage growth, further tightening would likely be modest. German yields rose modestly at the close, with the 2‑year note up around 0.9 bps and the 30‑year up about 2.5 bps; the bank maintains a view that bear steepening could continue. Oil prices remain anchored above pre‑war levels, limiting further declines in inflation expectations and risk premia. Meanwhile, fiscal concerns are re‑emerging as governments begin drafting next year’s budgets, with Belgium highlighted as a case study. The Monitoring Committee estimates a need for an additional €7.7 bn by 2029 and €9.8 bn by 2031 to meet the EU’s expenditure thresholds. France’s finance minister recently set a target deficit of 5 % for next year, a goal deemed ambitious amid upcoming presidential elections. Germany is projected to maintain a 4 % budget deficit through 2030. In Japan, longer‑dated bond yields climbed further, pushing the 10‑year and 20‑year notes to multi‑decade highs following a similar move the previous day. The 30‑year yield fell 7 bps after a solid auction, only to erase most of those losses later. This week’s month‑end U.S. refinancing operations are worth watching, beginning with a $58 bn 3‑year sale today, followed by 10‑year and 30‑year offerings later in the week. Currency markets were largely unchanged, with EUR/USD hovering around 1.14 and the DXY index near 101. Sterling continued its upward trajectory, pushing EUR/GBP above 0.855, with intermediate resistance at 0.8544 on the path toward the 0.85 level.
News & Views
Japan’s Ministry of Health, Labour and Welfare released May wage data today. Cash earnings rose 3.2 % year‑on‑year, slowing from April’s 3.6 % increase and slightly below expectations. Base pay, excluding bonuses and overtime, grew 3 % y/y. Real cash earnings slipped to 1.4 % after a 2 % rise in April, marking the fifth consecutive quarter of positive real growth, though the figure came in below the 1.7 % forecast. The Rengo labor union announced last week that it had secured average wage hikes of 5.01 % for its members, a development that remains a critical factor for the Bank of Japan as it seeks to normalize monetary policy. Nonetheless, the BoJ is proceeding cautiously, favoring a stimulative stance that contrasts with the government’s preference for tighter policy. At its June meeting, the BoJ raised its policy rate by 25 bps to 1 %, and markets price an 85 % probability of another hike by the end of 2026.
In the Bank of Canada’s Q2 business survey, overall sentiment slipped after three consecutive quarters of improvement. Sales outlooks softened modestly as higher fuel‑related costs weigh on spending, while export expectations improved on strong commodity demand. Most respondents reported no binding capacity constraints or labor shortages. The interim agreement between the United States and Iran has tempered firms’ previously elevated inflation expectations. On the consumer front, a slightly larger share now anticipates inflation above 3 % over the next 12 months, with two‑ and five‑year inflation expectations edging higher amid tariff and energy price pressures. Consumers’ views on the labor market improved modestly from recent lows. The survey serves as the final input for the Bank of Canada’s upcoming policy decision, where a hold at the 2.25 % rate is expected, though a year‑end hike is priced at roughly 50 %.
