The Japanese central bank left the base rate unchanged at 0.5%

Markets

The situation in the Middle East continues dominating headlines. Israel’s rapid dominance over western Iranian skies lowered chances of an escalation with Iran rumored to be willing to restart nuclear talks. The 1%‐rebound of stock markets adds to our hypothesis that – apart from oil prices – those regional conflicts often have a rather brief shelf life as dominant market theme. US President Trump abruptly leaving the G7‐meeting one day early and calling for Tehran evacuation sends risk sentiment the other way again this morning as the waiting game for stronger market forces continues. Tomorrow’s FOMC meeting, the approaching deadline of 90‐day tariff pauses (July 8), Senate progress of Trump’s beautiful bill (Senate version expected as soon as Monday; July 4 deadline is still on) or the German cabinet meeting to decide/unveil initial infrastructure spending plans (June 24) are all loose ends with (significant) market moving potential.  

Core bonds threaded water for most of the day, though the very long end of the US curve underperformed somewhat after an average 20‐yr Bond auction. At the margin, it contrasted somewhat with better sales of 10‐yr and 30‐yr Notes/Bonds last week. The US 30‐yr yield added 6.1 bps on a daily basis and is rapidly closing in on the psychological 5% mark (4.95% close). Breaching that level caused some more general market stress last month. The German yield curve ended almost at Friday’s levels. On FX markets, the dollar failed to profit from recent market volatility and higher oil prices. At EUR/USD 1.1558, it suggests that any sort of negative USD‐news could deliver another blow to the greenback. Short term (today), we eye US retail sales. Consensus expects a 0.6% M/M drop in the headline number with sales excluding auto and gas forecast to be 0.3% higher on the month. We see asymmetric risks with any signs of (tariff‐related) weakening in US consumer demand being used to ignite some Fed rate cut bets later this year and able to hurt the dollar. EUR/GBP holds steady this morning around 0.8515 with news of the signed trade deal between US President Trump and UK PM Starmer being discounted already. Tomorrow’s UK inflation numbers and Thursday’s BoE meeting are more important GBP‐drivers. Especially if they provide leeway to extending the quarterly cutting cycle.  

News and views

The Japanese central bank left the base rate unchanged at 0.5% this morning but adjusted its tapering plans. It had been reducing the amount of bond buying since August of last year with the aim of halving the JPY 5.7tn monthly pace to JPY 2.9tn through March 2026. This represented a decrease by JPY 400bn each quarter. The BoJ sticks to that plan but will slow down the tapering pace to JPY 200bn in the next fiscal year from March 2026 through March 2027. Monthly buying in this case will then have been trimmed to JPY 2.1tn. This will be subject to an interim assessment at the June 2026 meeting first and suggests the BoJ wants to keep all flexibility. It was in any case an expected move based on a survey by the central bank among market participants, asking about the optimal size of purchase reductions. Markets are not expecting much for the remainder of the year in terms of rate hikes. The BoJ noted moderating growth and sluggish underlying CPI but said that both would rise in the medium term. It mentioned trade in particular as a risk to the outlook. The Japanese yen rises slightly against peers this morning. Yields in the country add about 4 bps in longer tenors.

US president Trump and UK PM Starmer at the G7 summit have signed a document, agreeing to move ahead with the trade agreement/framework struck last month. Among the provisions are reduced US tariffs on UK auto exports from 27.5% to 10% on an annual quota of 100k vehicles. And after signing an executive order, Trump exempted UK’s civil aerospace aircraft sector from the baseline 10% tariff. A key UK demand also included an exemption on steel from the 25% levy but the US would only do so up until a certain quota that still needs to be set. UK in return a.o. committed to “working to meet American requirements on the security of the supply chains of steel and aluminum” including on the “nature of ownership”. This was done in particular to address US concerns on foreign ownership of British Steel, a major steel company acquired by China in 2020. The US also won UK concessions on agriculture.

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