OTP Morning Brief: US rate cut expectations declined further despite the favorable producer price index data
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OTP Morning Brief: Escalation continued in the Middle East
Escalation in the Middle East continued, with the Houthis now targeting Saudi facilities, pushing Brent crude prices close to $100 and intensifying global CPI concerns. Despite this, European equity indices showed only minimal movement, while the major US stock indices started the week in negative territory. German exports came in weaker than expected. Hungarian CPI was 1.3% year-on-year in August. Hungary’s budget deficit exceeded HUF 2,000 billion in August, although the figure was distorted by the pre-financing of the RRF program. US and Hungarian bond yields rose, German yields declined, while the forint remained largely unchanged. Today, attention is likely to focus on French industrial data and the Polish interest rate decision.
OTP Morning Brief: Escalation in the Middle East, Iran threatens to establish another restricted zone
The escalating conflict in the Middle East provided further support to oil prices on Monday, intensifying inflation concerns. Iran has also threatened to establish another restricted zone. Brent crude rose to USD 97 per barrel, while the European TTF gas benchmark climbed to nearly EUR 74/MWh. US markets were closed on Monday due to a public holiday. European equity markets closed mixed on Monday, with the Stoxx 600 ending the session flat. Geopolitical risks were offset by a revised estimate showing stronger-than-expected Q2 eurozone GDP growth, as well as the Sentix investor confidence index rising to a four-year high, while investors continue to assess the outcome of the weekend's German elections and prepare for the ECB's policy meeting on Thursday. German long-term yields continued to rise, with the 10-year Bund yield closing near 3.38%. Markets expect another ECB rate hike by year-end following the anticipated September increase. EUR/USD remained above 1.16. Hungarian long-term yields showed movement only at the far end of the curve, with the 10-year yield falling to 5.43%, while EUR/HUF edged above 363. Today, attention will be focused on Hungary’s August CPI data.
The favorable July producer price index data led to a further decline in US rate cut expectations on Thursday. Markets are now pricing in a Fed rate cut only in December. Declining rate cut expectations provided a boost to US equities, with the technology-heavy Nasdaq posting the strongest gains among the major indices. Sandisk shares surged 13.7%. In Europe, major stock indices moved only modestly, with the STOXX 600 remaining broadly flat. The favorable US CPI data led to a decline in developed market government bond yields. Today, the second estimate of eurozone Q2 GDP is due for release, while additional July retail sales data will be published in the US.
European stock indices posted only modest movements on Thursday
On Thursday, the STOXX 600 remained broadly flat. The DAX slipped 0.1%, the CAC 40 declined 0.3%, while the FTSE 100 fell 0.6%.
Among individual stocks, Maersk shares rose 9.4% after the Danish shipping company significantly exceeded profit expectations and raised its full-year earnings guidance for the second time this year. Higher freight rates, driven by the Middle East conflict and robust demand, supported the stronger outlook. Adyen was among the best-performing stocks in the STOXX 600, with its share price soaring 16.4% after the Dutch payment services provider increased its full-year revenue growth forecast. In contrast, Swissquote shares plunged 14% after the financial and trading services company reported first-half results that fell short of expectations due to weak cryptocurrency-related revenues.
UK GDP expanded by 0.4% quarter-on-quarter, in line with expectations. The Polish economy grew by 0.9% on a quarterly basis, resulting in 3.8% year-on-year growth, also matching forecasts. Meanwhile, eurozone industrial production was unchanged in June compared with the previous month, translating into 0.1% year-on-year growth.
Hungarian construction output fell by 3.9% in June compared with May, resulting in a 1.2% year-on-year decline in production volume.
In the region, the BUX declined 0.2%, while the WIG20 fell 1.4%. The Czech PX index, meanwhile, gained 0.4%.
US equity indices were supported by the decline in rate cut expectations
Wall Street indices extended their gains on Thursday, supported by easing rate cut expectations. The S&P 500 rose 0.7% to reach a new record closing high. The Dow Jones gained 0.1%, while the technology-heavy Nasdaq Composite advanced 0.8%.
US producer prices came in more favorably than expected in July. Producer prices were unchanged on a monthly basis, while rising 4.7% year-on-year. Together with the CPI data released on Wednesday, the latest producer price figures suggest that the monthly increase in the core PCE, the Fed’s preferred inflation gauge, may have remained below 0.2% in July, following a 0.13% increase in June. As a result, the July reading appears broadly consistent with the Fed’s 2% inflation target. It is therefore no surprise that market pricing has fully discounted a September rate hike and has now also ruled out an October move. Rate expectations shifted lower again on Thursday, with markets currently anticipating a rate hike only in December. Meanwhile, the number of initial jobless claims rose modestly last week, indicating that the US labor market remains resilient despite the weaker-than-expected July employment data.
Shares of memory chip maker Sandisk surged 13.7%, while Micron Technology advanced 4.2%. Microsoft gained nearly 1%, and Meta Platforms posted a 2.8% increase. In contrast, Cisco Systems fell 8.4%, as the networking equipment maker's upbeat revenue guidance failed to meet investors' elevated expectations. Seven of the eleven S&P 500 sectors ended the session higher. The communication services sector led the gains with a 1.56% rise, followed by the real estate sector, which added 1.34%.
Brent crude prices declined by around 2%, snapping a six-session winning streak.
Developed market bond yields declined following the favorable US CPI data
Developed market bond yields eased following the favorable US CPI data. The yield on the rate-sensitive 2-year US Treasury fell by 6 basis points, while the 10-year yield declined by 4 basis points to 4.64%. The rally in bond prices was briefly interrupted by a weaker-than-expected auction of 30-year US Treasuries. The bonds were sold at a yield of 5.216%, slightly above market expectations. Meanwhile, the yield on the 10-year German Bund decreased by 2 basis points to 3.14%.
In Hungary, the 10-year government bond yield declined by 3 basis points to 5.42%. Following a 0.2% appreciation on Wednesday, the forint strengthened by a further 0.3% against the euro, reaching 363.41. At yesterday's auction, Hungary's Government Debt Management Agency (ÁKK) sold HUF 44.5 billion of one-year discount Treasury bills (DKJs) at an average yield of 5.22%, with demand exceeding supply by more than three times. The agency also sold HUF 10 billion of the floating-rate 2036/B government bond series and HUF 70 billion of the fixed-rate 2037/A series, the latter attracting more than HUF 221 billion in bids, equivalent to an oversubscription of over eleven times.
Today's highlights
Asian equity markets were mixed as trading approached the close. While the Nikkei and the KOSPI moved higher, the SSEC and the Hang Seng remained in negative territory.
Today, investors will focus on the second estimate of eurozone Q2 GDP. In the US, a clearer picture of consumer spending trends is expected from the release of July retail sales data, alongside the University of Michigan’s August consumer sentiment index.
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