Markets
Core bonds can’t catch a break. Selling pressure focused on longer tenors yesterday. The US yield curve steepened with daily changes ranging between -2.9 bps (2-yr) and +5.1 bps (30-yr). The US 10-yr yield reached a new short-term high at 1.67% this morning. The YTD recovery high stands at 1.77%. The German yield curve bear steepened with yields adding up to 6 bps at the very long end. The German 10-yr yield (-0.10%) again closes in on the YTD recovery high of -0.07% which is the first reference of a resistance zone stretching via -0.05% (50% retracement on 2018-2020 decline) to the psychologic 0% barrier. Real yields were responsible for the lion share of yesterday’s action even as central bankers push back against the aggressive repositioning on money markets. The German 10y real yield bounced 5 bps off the all-time low near -2.1%. These underlying dynamics help explain the euro’s performance against an overall weak dollar. EUR/USD closed at 1.1633 from an 1.1609 open after a failed intraday test of first support at EUR/USD 1.1664. The pair this morning seems on its way for a second attempt. The trade-weighted dollar closed narrowly above 93.73/67 first support, but is losing the threshold as we near the start of European dealings. USD weakness and CNY strength caused a strong move lower in USD/CNY with the pair diving sub-6.40 for the first time since June and escaping the 6.42-6.50 trading range of the past months. USD/JPY remains exception to the rule as JPY can’t battle both rising (real) yields and a neutral/slightly positive risk climate. USD/JPY is currently testing the 2018 top (114.55) with next big resistance at the end of 2016 high of 118.66. EUR/JPY (133.43) is rapidly closing in on the YTD high at 134.13. Sterling outperformed the euro as the UK currency continued to receive (ST) interest rate support in the wake of this weekend’s hawkish BoE Bailey comments. EUR/GBP’s attempt to recapture 0.8450 fails so far. This morning’s softer than expected UK CPI numbers (0.3% M/M & 3.1% Y/Y vs 0.4% M/M & 3.2% Y/Y) might trigger a new attempt.
Today’s eco calendar can’t inspire with only final September EMU CPI numbers. Focus again shifts to speeches by ECB governors who reluctantly witness markets discounting a 2022 inaugural rate hike. The US Treasury sells $24bn of 20-yr bonds. The outcome will be telling for sentiment at the very long end of the (US) curve. The Fed’s Beige Book provides anecdotic evidence about the state of the US economy. Inflation pressures are a given, but how about (future?) growth. Will it add to stagflation worries? While interesting, we don’t expect a big market impact. Focus remains on the sell-off in core bonds, which this week doesn’t spill into stress on other markets (eg stocks; peripheral debt; FX) yet.
News headlines
Chinese home prices declined 0.08% in September, the first drop since April 2015. Only 27 cities reported monthly prices gains, compared to 46 in September, the lowest since February 2020. Prices for existing homes in the secondary market fell for a second consecutive month (0.19%). The decline comes amid attempts of local authorities to reign in real estate speculation by tightening borrowing conditions for real estate transactions. Compared to the same month last year, price growth for new homes eased to 3.8% in September from 4.2% in August. As the sector was an important contributor to overall growth for the Chinese economy, further price declines might complicate the broader picture on growth. It also might add to financial stability issues with respect to big developers.
US housing data disappointed as well. Housing starts declined by 1.6% M/M. The August figure was downwardly revised to 1.2% from 3.9%. Building permits even unexpectedly fell by 7.7% M/M, bringing the absolute level to the lowest since September last year. Shortages both in materials and in the labour market are mentioned as the main reason behind the slowdown. Housing completions dropped 4.6%, reaching the lowest level since August last year. At the same time the stock of housing under construction increased further, resulting in a record gap between finished houses and housing under construction.
