Core Bonds Recoup Some Losses

Markets

While we would label the US Empire Manufacturing index as data of secondary importance, markets yesterday clearly disagreed. The sentiment indicator jumped more than expected from 19.8 to 30.9. Even though the 6m forward looking component was much less convincing, it triggered a sharp intraday rise in US bond yields in – admittedly – a lower-volume session. Inflation expectations accounted for two thirds of the move as the price component advanced to the second-highest reading on record. The curve bear steepened with changes ranging from 0.4 bps (2y) over 4.4 bps (7y) to 7 bps (20y). The 10y camped back north of 1.6%. German yields jumped in lockstep but bear flattened instead, ignoring ECB’s Lagarde trying to quash rate hike bets before the European Parliament. Rates rose 5.2 bps (2y) to 2.5 bps (30y). The firmer short-end rate support for the euro proved no match for the technical charts. EUR/USD succumbed and lost support from both the downward sloping trend line (connecting June- Oct lows) and the interim June 2020 high (1.1422) to finish sub 1.14 for the first time in more than a year. The trade-weighted DXY headed further north (95.4) in the upward sloping trend channel. The euro also fell against a resilient sterling. The BoE before UK Parliament stuck to its view that normalizing policy is necessary but it first wants more evidence on the labour market strength. EUR/GBP gave up the 0.85 big figure again. Cable ventured above 1.34.


It’s quiet during Asian dealings today. The Chinese yuan’s strength is noticeable following a constructive summit between US president Biden and his counterpart Xi Jinping. USD/CNY trades at 6.37. The Australian dollar retreats from its intraday high as RBA governor Lowe sought to push back against early tightening bets (see below.) EUR/USD licks its wounds after yesterday’s technical break. The pair trades near 1.137. Core bonds recoup some losses. US retail sales grab market’s attention today. Consensus lies at 1.5% m/m for the headline series (0.9% control group). We see some minor risks for a downward surprise, having last week’s U. of Michigan survey in mind where US consumers cited searing inflation as eroding purchasing power. Having the technical charts in favour, it may not hurt the USD that much, especially against an ailing euro. After yesterday’s sharp rise, a disappointing report could weigh on core/US bond yields in a daily perspective. The UK labour market report came in strong this morning, allaying some of the BoE’s fears and strengthening the case for a rate hike once again. EUR/GBP weakens towards 0.846. First meaningful support kicks in at 0.845 before the 2021 low of 0.84.

News headlines

RBA governor Lowe again tried to push back against early rate hike bets. Latest data and forecasts do not warrant an increase in the cash rate in 2022. It would need considerable changes to growth/inflation outlook for the RBA to even contemplate it. Australian inflation is only just above the bottom of the 2–3% target range. Lowe thinks that wages will need to grow at 3 point something to sustain price pressure around the middle of that target range. AUD/USD trades a tad softer this morning near 0.734. Australian yields follow the new global repositioning move higher though with the curve bear steepening this morning. The very long end of the curve adds up to 6.5 bps with the front end 2.2 bps higher.

CNB deputy governor Nidetzky said that the central bank’s two-week repo rate will move somewhere above 3% at the turn of the year. The key rate currently stands at 2.75% following an unexpectedly aggressive 125 bps hike earlier this month. The CNB at that same meeting had a discussion about the peak level of interest rates and the pace for reaching it. Autumn forecasts suggested that it could be around 3.75% compared to a neutral rate of around 2.5- 3%. Czech inflation is projected to peak around 7% early next year with demand and supply pressures equally responsible for the move. The CNB with its tightening cycle tries to influence the demand part. EUR/CZK trades stable near the recent bottom of 25.20.

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