Markets
(Interest rate) markets continued look for a new equilibrium Friday, as they pondered the consequences of the new US monetary policy framework as announced by Fed Chair Powell at the Jackson Hole symposium on Thursday. In a first reaction, the reinforced Fed commitment on higher inflation and maximum employment caused a bear steepening of the US yield curve, with especially yields at longer maturities reaching first resistance. However, this rise in yields already petered out on Friday. Even with higher inflation expectations, the Fed is still expected to keep rates low for very long. For now, it is also still uncertain via which technical steps the Fed intends to execute its new strategy. US yields corrected lower on Friday, but some tentative steepening remained in place. US yields declined between 4.4 bp (5-y) and 0.8 bp (30-y). Changes in the German yield curve were less than 1 bp. The -0.37% resistance marks a solid resistance (top of sideways range) for the German 10-y yield. The Fed’s commitment on a (temporary) overshoot of its inflation target continued to weigh on the dollar. The trade-weighted dollar (DXY) almost touched this year’s low (close at 92.37). EUR/USD finished the week just north of 1.19. The most impressive decline among the USD majors was recorded in USD/JPY. The USD decline combined with some kind of safe haven bid for the yen due to the uncertainty on the resignation of Japanese PM Abe, pushed USD/JPY from the high 106 area to fill bids in the 105.20 area (close 105.37). The UK currency showed remarkable strength on Friday. EUR/GBP declined further in the 0.89 big figure (close 0.8916) even as BoE’s Bailey reiterated that a negative policy remains part of the BoE policy toolkit.
Asian markets started the new week in risk-on modus, even as there is erosion on early morning strength. A strong WS close on Friday is supporting sentiment in Asia this morning. The official China August PMI’s indicated that the country’s economic recovery remains on track. The manufacturing measure stabilizes near 51.0, but the non-manufacturing PMI improved further from 54.2 to 55.2, indicating a further recovery especially in domestic activity. The combination of USD weakness and constructive prospects for the Chinese economy pushed the USD/CNY cross rate for a test of the 6.85 level.
Today’s eco calendar is thin, with the German August inflation data (expected at 0.0 % M/M and 0.1% Y/Y) the exception to the rule. UK markets are closed. Later this week, the calendar is well filled with the US manufacturing ISM and EMU CPI (Tuesday), the US ADP labour market report (Wednesday), the US non-manufacturing ISM and jobless claims (Thursday) and the US payrolls report on Friday. Markets will also keep a close eye on comments from Fed members looking for guidance on the concrete implementation of the Fed’s policy framework. For today, more technical trading might be on the cards. We expect last week’s rise in LT core US and, to a lesser extent, EMU yields (10-y) to be capped at key technical resistances. For the dollar, we don’t see a clear trigger for a sustained comeback, in particular in a context where the Fed’s commitment on inflation continues to support a risk-on environment.
News Headlines
UK Treasury officials are considering significant tax increases to raise at least 20bn pound per year to finance the growing budget deficit, the Telegraph reported citing multiple sources. Among the proposals include slashing pension tax relief, raising fuel and other duties, an online sales tax, aligning capital gains tax with income tax and a possible increase in corporate taxes from 19% to 24%.
The Czech ruling parties agreed to cut income taxes, PM Babis announced last Friday. Over the weekend, CNB president Rusnok criticized the move, which could lower budget revenues by 74bn CZK, as not well thought-out, saying it endangers public finances. Rusnok added the CNB won’t ease policy further at this stage.
