Markets
European yields initially continued Tuesday’s rise. Markets still pondered the impact of the 3% inflation reading and subsequent comments from some more hawkish ECB members on the tapering narrative going into next week’s ECB policy decision. The German 10-y yield tested the -0.35% area. The EMU 10-y swap rate just failed to touch positive levels. European eco data were few. US data, however, a big miss in the ADP private job report broke the upward dynamics in yields on both sides of the Atlantic. Later in the session, the US manufacturing ISM was OK. Output and orders were strong. Supply bottlenecks persist with the employment index even falling back into contraction territory (49). Too much of a mixed bag to support a sustained directional market move. The US yield curve slightly flattened with yields declining about 2 bp for the 10-30y sector. European yields reversed most their earlier rise. Some tentative steepening still survived with the 10 and 30-y German rising 1.0 bp and 2.5 bp respectively. US equities (Nasdaq and S&P500) tested record levels but in the end closed with limited gains. The dollar set a minor short-term correction low post ADP but managed to limit the damage later in US dealings (EUR/USD close 1.1839, DXY 92.456). Some underlying euro resilience apparently is also still at work. EUR/GBP continued its recent uptrend and is challenging the 0.86 big figure.
Asian equities are trading mixed with the likes of China (persistent regulation issues) and Australia underperforming. The dollar remains in the defensive (DXY 92.50, EUR/USD 1.1840). The US 10-y yield wavers near the 1.30 pivot.
Trading today will probably face some kind of interludium ahead of tomorrow’s US payrolls report. EMU July PPI data might add to the inflation debate, but are no market mover. While covering a different period, US jobless claims (expected to ease slightly further to 345k) will be assessed as a precursor for tomorrow’s payrolls. US interest rates stay in a holding pattern post Jackson Hole. The 1.37%/1.38% resistance for the US 10-y yield still looks quite far away/solid. For Europe, question is whether there is room for a further autonomous rise in LT yields. Is the 10-y swap ripe to return north of 0%? On the FX market some by default euro resilience and at the same time USD softness might continue. EUR/USD 1.1909 remains next target on the technical charts. The dollar probably needs a meaningful upward surprise from the labour data (today and tomorrow) to change fortunes for the better.
News headlines
OPEC+ reaffirmed its plans to dial back pandemic-induced production cuts by an additional 400k barrels/day in October. The cartel withstood recent US pressure to beef up production faster. Oil producing and exporting countries already restored around 45% of unused capacity, eyeing a return to normal by September 2022. The compensation period for some OPEC-members – a quid pro quo to agreeing increased production; eg UAE in July – will be extended until December 2021. The Meeting noted that, while the effects of the COVID-19 pandemic continue to cast some uncertainty, market fundamentals have strengthened and OECD stocks continue to fall as the recovery accelerates. OPEC+ raised oil demand growth forecasts for next year, but still expects the market to shift form a supply-demand deficit in 2021 to a little surplus in 2022. Oil prices didn’t really respond to the expected outcome. They nevertheless traded volatile with low inventory data partly erasing earlier losses. Brent crude currently trades around $71.4/b.
South Korean inflation unexpectedly remained at a 9-yr high in August, leveling at 2.6% Y/Y following a monthly 0.6% gain while consensus expected a slowdown to 2.4% Y/Y. Inflation now tops the Bank of Korea’s 2% inflation target for a fifth month running. Details showed agriculture, livestock, and fisheries (+7.8% Y/Y) and petroleum products (+21.6% Y/Y) to be responsible for the higher outcome. Underlying core inflation ticked up from 1.7% Y/Y to 1.8% Y/Y. Inflationary pressure are likely to persist at least until the end of the year and add to the case that the BoK might hike rates one more time. Last week, they became the first major Asian central bank to engage to a tightening cycle. Separately, Q2 GDP faced a small upward revision this morning, from 0.7 % Q/Q to 0.8% Q/Q. The Korean won didn’t profit from the CPI release with USD/KRW even returning above 1160.
