Markets
Core bonds finally stopped rallying today. Both the German Bund and US Treasuries already looked exhausted yesterday with the former underperforming by paring most or all of the intraday gains. The resulting hammer candlestick (in yields) met with follow-through price action at the final day of a remarkable trading week. US Treasuries underperform this time, with yields sprinting 4 bps (5y) to 4.5 bps (10y) higher, carried by both a bottoming out in real yields and inflation expectations. German yields rise more modest with the long end adding 1.9 bps (10y) to 2.3 bps (30y). Bund outperformance might be rooted in a flurry of ECB speeches in the wake of the policy review, each with different nuances. Bundesbank governor Weidmann for example stressed the ECB will allow but won’t deliberately seek inflation overshoots. France’s Villeroy said the new 2% target is not a ceiling. The ECB minutes also weighed on European yields. They showed how the central bank is very much on edge when it comes to rising (sovereign) yields, whatever the reason (eg. better economic prospects). One official advocated an increase of the PEPP buying pace. Yields rose even as the Chinese central bank heeded the State Council’s call yesterday to further cut the reserve requirement to support credit and economic growth. That embodied investor worries about cooling growth and prompted a sharp risk sell-off and a flight to safe havens on Thursday. The atmosphere completely turned today though with nice gains for European stocks of >1%. EuroStoxx50 currently fights resistance around 4040. Cyclicals on Wall Street outperform (DJI +0.9%). Other risky assets also perform better with both corporate and European peripheral government bond (-1 to -2 bps) spreads tightening. On FX markets, the classic safe havens bite the dust. The yen is the top loser, followed by the dollar and the Swiss Franc. EUR/USD erased early weakness to extend yesterday’s gain into the high 1.18(7) zone. EUR/JPY rebounds from 130 to 130.6 but USD/JPY struggles to regain 110. DXY is venturing towards the lower bound of the upward trend channel (92.21). Cyclical currencies profit with the likes of the NOK, AUD and CAD (also due to solid payrolls, cf. infra) topping the G10 scoreboard as commodities catch a better bid (Brent oil for example flirting with $75 again). Sterling has a better run today too as the sky cleared a bit. EUR/GBP retraces more than half of yesterday’s gain to trade around 0.856. Dynamics in the currency pair these last few weeks are worse than the Echternach procession: it’s three steps forward and three steps back.
News Headlines
Canadian June labour data indicated a solid improvement as the economy recovers from the lockdowns. The economy added 230.7k jobs vs. 175k expected. The economy lost a combined 275k jobs in May and April. The unemployment rate declined from 8.2% to 7.8%. The participation rate jumped from 64.6 to 65.2%. All employment gains was registered in part-time employment though. Full employment even declined 33.2k. The Bank of Canada will hold a regular policy meeting next week (July 14). Markets expect the BoC to further scale back the amount of weekly asset purchases by C$1 bln to C$2 bln. USD/CAD today declined slightly after being propelled by the risk-off (and a modest decline in some commodities) recently. USD/CAD is drifting below the 1.25 big figure.
Headline June inflation in Norway rose 0.3% M/M and 2.9% Y/Y, from 2.7% in May. However, core inflation (excluding energy and tax changes) was slightly softer than expected at 0.4% M/M and 1.4% Y/Y (from 1.5%). Amongst others, the rebound of the krone helps to ease underlying price pressures. The Norges bank at the June policy meeting indicated that it will soon be appropriate to raise the policy rate from the current level. Rising capacity utilization is limiting the risk of inflation becoming too low. High house prices are a factor too. Today’s inflation report probably won’t change the assessment of the Norges Bank. The Norwegian krone today showed a solid rebound after the risk-off losses incurred of late with EUR/NOK declining from 10.41 at the open to currently 10.34.
