Sunrise Market Commentary

Bond Markets Face Renewed Pressure

Yesterday witnessed a notable downturn in core bond markets, particularly across the US Treasury curve. The short-to-medium term segment bore the brunt, with the 2-year yield climbing 4.7 basis points and the 7-year yield advancing 6.4 basis points. This upward pressure is bringing the 30-year yield perilously close to its late July multi-year peak of 5.28%, a level that casts a significant shadow over the upcoming mid-month Treasury refinancing operation. This operation includes substantial offerings of 10-year Notes and 30-year Bonds, heightening market sensitivity.

The 2-year yield has now fully erased its earlier dip experienced in the wake of last Friday's unexpectedly weak US jobs report. The Bureau of Labor Statistics initially reported a decline of 23,000 jobs in July, with revisions to May and June data also subtracting a combined 103,000 positions. This data had prompted a reassessment of the likelihood of a September Federal Reserve rate hike. However, the market's swift recovery suggests that the persistent inflation narrative remains the dominant force, eclipsing concerns about employment weakness.

This focus on inflation is amplified by hawkish commentary from Federal Reserve officials. Cleveland Fed President Hammack, who had previously dissented in favor of a rate hike at the July FOMC meeting, reiterated her stance that now is the appropriate time for policy action. Consequently, all eyes are now fixed on the forthcoming US Consumer Price Index (CPI) data due Wednesday and the Producer Price Index (PPI) figures scheduled for Thursday.

Geopolitical Tensions and Energy Price Spikes

Adding another layer of complexity to the market landscape is the ongoing stalemate between the US and Iran. This geopolitical friction continues to keep oil prices elevated, with Brent crude trading around $88 per barrel, a significant jump from last Friday's close of $82. Iran's refusal to engage in direct talks with the US, coupled with escalating demands, suggests a prolonged period of elevated energy costs. President Trump's strategic shift away from military action towards intensified economic pressure, including new demands for casualty compensation, further cements this volatile outlook.

The ripple effect of geopolitical events is also evident in European energy markets. The benchmark Dutch TTF natural gas contract surged from €55 per megawatt-hour to €62. This spike coincided with reports of a significant Ukrainian strike on a major oil refinery within Russia, illustrating the interconnectedness of global energy supply chains and the potential for rapid price escalations stemming from conflict.

Yen Weakness and Central Bank Watch

Foreign exchange markets saw significant movement in Japanese Yen crosses, with the yen succumbing to renewed selling pressure. This follows a period of intervention relief observed at the end of July. USD/JPY has climbed from 157.50 to breach the 159 level, suggesting that market participants are testing Treasury Secretary Bessent's commitment to support Japan. The stated aim is to bolster the Japanese economy, benefit US taxpayers, and stabilize the global financial system through these joint efforts.

Following the coordinated actions by Japanese and US authorities, attention now shifts to the Bank of Japan (BoJ) for further support of the yen through interest rate policy. BoJ Governor Ueda recently signaled an upcoming policy rate increase shortly after September, with the possibility of accelerating the pace of hikes if deemed necessary. This forward guidance aims to provide more substantial backing for the beleaguered yen.

Elsewhere in FX, the euro experienced limited volatility, with EUR/USD largely confined to a narrow range near 1.1550. Major equity indices also traded sideways, hovering close to their recent all-time highs. Today's economic calendar is relatively light, featuring only the US NFIB small business optimism index, indicating that the dominant themes of inflation concerns and geopolitical risks will likely continue to steer market sentiment.

The Bigger Picture

The Reserve Bank of Australia (RBA) held its policy rate steady at 4.35% this morning, a decision that comes amid persistent inflationary pressures. Both domestic capacity constraints and global oil supply disruptions are contributing factors. Indications suggest that higher fuel costs are filtering through to broader price levels for goods and services. Projections show inflation is unlikely to return to the RBA's 2%-3% target band until late 2027, with risks tilted to the upside.

Despite the elevated inflation outlook, the RBA acknowledged for the first time that current monetary policy is arguably restrictive. They also noted a gradual slowdown in consumer spending, a consequence of earlier rate hikes. This suggests an increased hurdle for further tightening, favoring a cautious wait-and-see approach. The housing market is also showing signs of cooling, with price declines in some cities and a noticeable drop in new housing loans, attributed to tighter policy, tax overhauls, and macroprudential measures.

New RBA forecasts anticipate slower economic growth ahead, though the economy is expected to be more resilient than previously thought, and the inflation trajectory is slightly lower. Following the RBA's decision, the Australian dollar saw a marginal decline, with AUD/USD slipping from 0.7060 to 0.7040. Market expectations for a final RBA rate hike around year-end remain relatively stable, hovering between 50% and 60%.