Sunrise

• US stock markets are showing increased vulnerability, with the Nasdaq dropping 1.5% yesterday as momentum stocks face defensive selling. • Despite benign June CPI and PPI figures, Dallas Fed President Logan warned that inflation is not yet on track to hit the 2% target, suggesting interest rates may need to remain modestly higher. • Risk aversion has spread to Asian markets this morning, with indices in China, Taiwan, and Japan seeing declines between 3% and 6%.

• Wall Street rebounded after a long weekend, with the Nasdaq rising over 1% and the Dow Jones closing at another record high despite initial volatility. • Treasury yields experienced choppy trading, with net daily changes ranging from -3.1 bps for 3-year notes to 0.1 bps for 30-year bonds. • Japan's Ministry of Health, Labour and Welfare reported May labor cash earnings rose 3.2% year-over-year, falling from April's 3.6% and missing market expectations.

• US markets were closed on Friday, July 4th, in observance of the Independence Day holiday. • During the European session, stocks rose by 0.8% and yields increased by 2–3.8 basis points, while the US dollar remained mostly flat. • The USD/JPY pair stood out as an exception, with initial gains for the yen evaporating as the trading day progressed.

• A high-profile panel debate at the ECB Sintra forum featuring Fed Chair Warsh, ECB President Lagarde, BoE Governor Bailey, and Bank of Canada Governor Macklem failed to provide new insights into short-term monetary policy. • In contrast, the Bank of Korea is expected to raise its current 2.5% policy rate multiple times in the coming months due to persistent inflation above the 2% target. • South Korea's economy continues to benefit from the AI and semiconductor boom, though the Korean won remains historically weak, trading around USD/KRW 1554.75.

• Market trading during the final session of the quarter was driven by end-of-quarter repositioning, comments from the ECB Sintra forum, and new economic data. • July inflation figures for EMU members showed slight downside surprises, with Germany reporting HICP of -0.2% M/M (2.4% Y/Y) and France reporting -0.3% M/M (2% Y/Y). • Italy's data showed a slight increase of 0.1% M/M, resulting in a yearly inflation rate of 3.1%.

• Today's economic calendar focuses on European data, specifically the European Commission's confidence indicators and June inflation figures for Spain and Belgium. • Market participants are awaiting the EMU CPI figures due Wednesday, with consensus expectations of 3% Y/Y for headline inflation and 2.5% Y/Y for core inflation. • These projected declines in inflation may reduce the immediate pressure on the European Central Bank (ECB) to implement further monetary tightening.

• May US PCE deflators, the Federal Reserve's preferred inflation gauge, were released yesterday and aligned closely with market expectations. • The data serves as a critical reality check following the Fed's explicit commitment last week to prioritize its price stability mandate. • This focus on inflation persists as the US economy continues to show resilience in both overall growth and the labor market.

• Core bonds rallied recently, with US Treasuries outperforming German Bunds as yields fell across the curve. • US Treasury yields dropped between 5.2 bps for 2-year notes and over 10 bps for 30-year bonds, while German rates eased by 2.4 to 6 bps. • The decline was primarily driven by end-of-quarter extension buying and a continuous drop in oil prices.