Sunset Market Commentary – ActionForex

Markets

The geopolitical focus turns from the Middle East to China the next two days as US President Trump pays a high-profile visit to Beijing. Expectations going into the summit with Chinese President Xi Jinping are rather low. An extension of the current, fragile, stabilization on trade and an agreement to a follow-up meeting seems to be the best outcome. The US hopes to secure more Chinese promises for purchases US goods and maybe also some help with forcing Iran to the negotiation table. By granting a predictable trade framework, the US hopes to avoid that China uses its stronghold on the export of critical minerals. China on its side might seek concessions on Taiwan which is a thorny issue and potential pitfall for the capricious US president.

April US producer prices surged more than expected. Headline PPI accelerated to 1.4% M/M. That monthly pace is the second fastest since the start of the series at the end of 2009. It ranks second to March 2022 (1.7% M/M) with the start of the Russian invasion coming on top op reopening post-Covid economies. On an annual level, producer price inflation increased from an upwardly revised 4.3% to 6% (vs 4.8% consensus). That’s the strongest pace since December 2022. Core PPI markets showed the same dynamic. Producer prices excluding food and energy rose by 1% M/M and 5.2% Y/Y. Also stripping out trade resulted in 0.6% M/M and 4.4% Y/Y. Services costs rose by 1.2% M/M, the most in four years. Broadening price pressures triggered intraday underperformance of US Treasuries. The US 2-yr yield briefly breached the psychologic 4% barrier. The US 10-yr yield was a whisker away of 4.5%, reaching the highest level since July of last year. The US 30-yr yield extends its stay above 5% and keeps the multi-annual highs around 5.15% withing sight. Tonight’s $25bn 30-yr bond sale will be closely monitored after yesterday’s sluggish $10-yr Note sale. Interest rate support and sticky oil prices ($107.5/b) continue to offer some support for the dollar with EUR/USD currently changing hands around 1.17. The EMU eco calendar was thin so far this week, but speeches by ECB President Lagarde and chief economist Lane after European trading have market moving potential. Lane is expected to update the slide deck he’s used on a number of occasions since the start of the war in Iran. It will be especially interesting to see how current pricing relates to the central bank’s base and adverse scenario’s. Lagarde and other ECB members recently suggested that we’re moving further away from base. An adverse scenario calls for a measured adjustment of policy as currently discounted in money markets. The market-implied probability of a June 25 bps rate hike currently stands at 83% with markets discounting a cumulative 75 bps of tightening by end 2026.

News & Views

The Hungarian forint slipped intraday, moving from as high as EUR/HUF 357 to 360. The pair is currently changing hands around 358.7. The currency weakened after the central bank unexpectedly lowered the interest rate on FX swaps by 50 bps to 5.25%. “The purpose of the instrument is to serve as a back-up option on the FX-swap market, thereby ensuring the effective interest rate transmission,” the statement noted. But with market and liquidity conditions having improved, Budapest saw “greater room for market-based developments to prevail”. The current rate is 100 bps lower below the base rate but that should not be seen as a change “in the strict and careful monetary policy stance”. The MNB decision comes after a strong surge Hungarian assets, in the currency but also government bonds. EUR/HUF traded north of 390 in the wake of the Iran war before staging an impressive comeback, supported by the ceasefire and later pro-European Tisza’s election victory mid-April.

OPEC lowered its forecast for oil demand growth in 2026 today. It now projects demand to expand by 1.2 mln barrels per day compared to the 1.4 mln it had pencilled in last month. That should rise to approximately 1.5 mln in 2027, an upward revision by 200k from the April forecast. OPEC stuck to its supply growth forecast coming from countries outside the cartel, amounting to 600k barrels a day both in 2026 and 2027. Brazil, Canada, the US and Argentina were the prime drivers. Its views on global economic GDP growth also remained unchanged at 3.1% and 3.2% this year and the next respectively.