Markets
The correction on recent trends in bonds and FX continued yesterday. Last week, yield curve steeping (temporarily) accelerated after Fed Powell announced a symmetrical 2% inflation target and a strong commitment on maximal employment. However, this move leading to higher inflation expectations and at the same time lower real yields already petered out this week. The US yield curve yesterday succeeded a further (corrective?) bull flatting with the 2-y little changed (+0.2 bp) but the 30-y yield declining 4.1 bp. The US real 10-y yield (-1.08%) shows tentative signs of bottoming. The US ADP private job report printed substantially weaker than expected, but had little value to explain the day move. The moves in the German yields curve were even more striking with yields declining between 2.2 bp (2 y) and an impressive 5.9 bp for the 30-y yield. Recent weak/negative EMU inflation data maybe added to the outperformance Bunds. The dollar regained further ground after testing key support earlier this week. EUR/USD’s failure the clear the barrier of 1.20, provided a good reason for profit taking on USD shorts. EUR/USD closed at 1.1855. The TW dollar also couldn’t build on the break below the year low (92.13) and rebounded to the high 92 area. A tentative bottoming in the US real yields also removed some pressure for the USD. On the euro side of story there are growing signs that the EUR/USD rebound is becoming an item for ECB policy (FT this morning). Moves in USD/JPY remains modest (106.18 close). Sterling continued to performed rather well. Cable outperformed (lost less) on the broad USD rebound. EUR/GBP even continues its downside correction. This sterling resilience occurred even as EU Brexit negotiator Barnier in extenso elaborated on the persistent deadlock in the Brexit negotiations. Several BoE members recently also indicated that the Bank of England still has ample room to give additional policy support if needed (cf infra). For now it doesn’t hurt sterling. EUR/GBP is nearing the 0.8865 support. The correction of recent trends in bonds and FX still didn’t affect the euphoria among equity investors. The S&P and the Nasdaq again closed at record levels and European equites even slightly outperformed in a daily perspective.
Asian equities are mostly trading in positive territory, but gains are modest compared the to strong close on WS. The Caixin China serves PMI eased marginally to 54.0 (from 54.1), but confirms the rebound in the sector. However Chinese equities underperform. The yuan eases slightly on the overall USD rebound (USD/CNY 6.8425).
Today, the focus is on the US non-manufacturing ISM and the US jobless claims. The ISM is expected to ease from 58.1 to 57.2, which remains a high level. Initial claims are expected to drop below 1 mln (950k). On the interest rate markets the US and German 10-y yield have decisively returned in the pre-Powell ranges. For now, a break higher to higher inflation expectations looks unlikely. The dollar this morning continues its corrective rebound. EUR/USD returns tot the 1.18 area. First important support is coming in in the 1.17 area (bottom of previous ST term range).
News Headlines
ECB member Weidmann said the central bank should withdraw its emergency support as soon as the economy has recovered from the pandemic’s shock, adding that PEPP has to be limited in time and linked to the current crisis. The scaling back is important to avoid building negative side effects. Weidmann also criticized the €750bn rescue fund, warning it risked creating some kind of “debt illusion”.
SF Fed president Mary Daly became the next in line to urge the US government to spend more under the form of investments in roads, bridges, education and other productivity-boosting infrastructure to help pull the economy back on track. She acknowledged the Fed could also do more in terms of forward guidance but sees no pressing need to do so right now.
Bank of England Deputy Governor Ramsden told lawmakers the central bank still has capacity to ease policy further if needed by increasing the pace and size of its bond-buying program. His comments echo governor Bailey’s last week, who didn’t want to rule out negative rates either and come as the UK braces for a possible triple whammy from a resurgence in the coronavirus, rising unemployment and a possible chaotic Brexit at year’s end.
