AFS Markets Blog: Midday 01/07/2026

• Meanwhile in markets, our central bank overlords in the ECB tower in Frankfurt are starting to get second thoughts about their rate hike campaign. What started as toe-tipping and reluctant hedging of bets on Tuesday has morphed into a full-blown campaign to put a hold on the table. Not just for the July meeting, but – more importantly – for the September meeting too, when staff produce their infamous quarterly forecasts;

• The ECB’s latest about-face started this morning with an unusually cautious Bundesbank President Nagel. In an interview with Bloomie TV at the Sintra forum this morning, he said that because of the spectacular decline in oil prices it’s an “open race” if the July and September meetings will be a hold or another (and final) 25bps hike. With the benefit of hindsight, Nagel nailed it. His dovish U-turn released a flood of more dovish ECB-speak. Governing Council member Kocher, who heads the Austrian central bank, spoke in a similar vein by suggesting the next two meetings will produce holds or one hike;

• The real kicker came from Belgian central bank chief Wunsch, who I rate as a bellwether for the inclinations of the entire Governing Council. Wunsch opined that the case for another hike is receding if energy prices remain contained. A one-and-done hike would suffice to counter the energy price shock that is receding in the rearview mirror day by day;

• ECB-dated ESTRs for the July and September meetings fell by a couple of bps on the headlines. We did not reach new lows despite the dovish cacophony that ECB-speak has become. For the July meeting, about 2-3bps of hikes are still priced in. And for the September meeting, about 17bps of hikes are priced in. July should be priced out and September should shift to greater odds of a hold than a hike. Having said that, I get it that punters continue to price in odds of a hike. That’s fear speaking. Fear that the US-Iran deal could still fall apart;

• Doves on the ECB Governing Council got a tailwind from this morning’s Eurozone CPI release. Headline printed lower than expected at 2.8 percent, which compares with consensus of a 3.0 percent increase. Core printed at 2.4 percent versus 2.5 percent expected. As always, I wait for the detailed figures that Eurostat will release later this month before I pass judgment on the numbers;

• Turning to some market commentary, Eurozone govvie yields are off the highs on the back of dovish ECB speak and the lower than expected CPI. US Treasury yields are still loitering near the highs of the days in anticipation of Fed Chairman Warsh’s first public speaking engagement since the June FOMC presser. Warsh will be on a panel with other central bankers. Which gives him plenty of fig leaf cover to say as little as possible. Having said that, Warsh will likely repeat his hawkish lines on inflation from the June FOMC presser (simply because he has to). That should be enough to keep hopes of a July Fed hike alive, and justify forward OIS to price in two quarter point hikes;

• In the greater scheme of things, 10y and 30y Bund yields are somewhat closer to the pre-war lows (when we’re pricing in ECB rate cuts, mind you) than they are to the war highs. US Treasury yields continue to underperform Bunds, with yields closer to the highs of the year than the pre-war lows;

• Keep an eye on Eurozone peripheral spreads. Surprisingly, spreads haven’t narrowed further on the back of ECB rate hike pricing easing. OATs are underperforming – predictably because punters are nervous about next year’s Presidential election;

• European equities are modestly lower, with losses that barely register. In the greater scheme of things, the Stoxx50 is showing a healthy YTD gain of about ten percent, equal to the performance of the S&P 500. But these markets are left in the dust by stuff like the Nasdaq (up twenty percent for the year) or the Korean Kospi, which is up hundred percent YTD for all too familiar reasons;

• Elsewhere, Brent crude oil futures prices took the plunge later in the morning, falling to post-war low of around $71.6 a barrel. The broad dollar is up this morning ahead of Warsh, but failed to break new ground – that is a multi-month high;

• Looking ahead, besides Warsh and more ECB-speakers we will be eyeing the US ISM manufacturing PMI out at 16:00 CET. Since I don’t expect Warsh to say much of substance besides his usual lines about finally meeting the inflation target and taskforces here and there, the focus this week is on tomorrow’s US labor market figures. Payrolls should print at a solid 115k, which gives the Fed more reason to tighten.

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