Markets
US payrolls were supposed to remove the final hurdle for the Fed to announce bond tapering at the November 3 meeting. Fed Powell recently indicated that an OK report would pull the trigger. The report in the first place was misty and complicated. Headline payrolls missed the consensus by a big margin (194k vs 500k expected). However, an upward revision for the previous two months (169k) and a sharp decline in government education employment being distorted by seasonal adjustment issues, suggest the underlying picture of the labour market was better than indicated by the headline figure. A decline in the unemployment rate from 5.2% to 4.8% and weekly hourly earnings rising to 4.6% Y/Y also suggest that the ‘pre-announced’ start of tapering shouldn’t be delayed. The instant Treasury reaction mainly showed hesitation, but US yields soon resumed their trip north with several maturities clearing next technical references. Persistent high oil/energy prices supported the upward yield dynamics/higher inflation expectations. US yields rose 3.7/3.8bp for the 5-30-y sector of the curve, with the 10-y clearing the 1.60% barrier. European yields joined the move in the US with German yields rising between 1.3 and 3.4 bp. In this respect, European yields are now also reaching important crossroads with the 10-y swap (0.23%) testing the February 2020 top/38% retracement since February 2018. The German 10-y is testing the -0.15% area, the final resistance ahead of the -0.07% post-corona top. US equities finished marginally softer. The trade-weighted dollar lost marginal ground (94.06). EUR/USD gained a few ticks (close 1.1569). The rise in US and German yields made the yen a distinct underperformer with USD/JPY jumping to 112.24 (from 111.63) and EUR/JPY closing at 129.86 (from 128.94).
Asian equities show a mixed picture with China and Japan outperforming. The sell-off of the yen continues unabatedly (USD/JPY 112.70, EUR/JPY 130.40). US bond markets today are closed in observance of Columbus Day. Several ECB members are scheduled to speak including ECB’s Lane and Villeroy. Of late they didn’t really change their assessment on the temporary nature of inflation. Even so, markets apparently take a different view with European interest rate markets testing key technical levels (cf supra). A further rise of EMU inflation expectations might be food for further thought at the ECB. EUR/USD isn’t out of the woods, but at least the decline slowed at the end of last week. Will a rebound of EUR/JPY help this bottoming out process? EUR/USD 1.1529/1.1495 remains key. This weekend, both BoE’s Saunders and BOE governor Bailey fueled market expectations on an early BoE rate hike. Saunders said markets were right to do so. Bailey warned on the damaging effects inflation for consumers. Sterling is picking up the message. EUR/GBP (currently near 0.8485) is nearing in the key 0.8450 support.
News headlines
The Czech opposition secured a majority of the seats at the 2021 parliamentary elections last weekend. The Together coalition with the PirStan coalition (Pirates Party + STAN) were on track for 108 of the 200 seats. This compares to the 68 the group of five parties won in 2017. The leader of Together, Fiala, and Bartos of the Pirates Party both said that their groups had a chance to form a government and oust incumbent PM Babis and his ANO party. ANO was on its way to win 72 seats (vs 78 in 2017). Being still the biggest single party, ANO will probably be given the first chance by the president to form a government. However, Together and PirStan already ruled out working with Babis while the PM’s previous allies, the Social Democrats and Communists, failed to retain any seats. The Czech krone is holding steady around EUR/CZK 25.44 this morning.
Austrian chancellor Sebastian Kurz announced his resignation on Saturday. Kurz was a suspect in a corruption investigation in which he allegedly misused taxpayer money to buy positive media coverage during his time as a foreign minister in 2013-2017. Current foreign minister Schallenberg will take over while Kurz keeps his seat in the cabinet. Kurz’ position was becoming unsustainable after his government partners, the Greens, were contemplating to form their own coalition just to oust him. On Tuesday, the government might face a motion of no confidence tabled by the opposition. If it passes, early elections are due.
