Markets
Volatility on interest rate markets eased further yesterday and this supported a risk-on rebound. The process already started in Europe and was supported by a soft US CPI report (core inflation declining from 1.4% to 1.3%). The US 10-y auction was mediocre at best (award at 1.523% VS Wi 1.513, bid-to-cover at 2.38), however with little lasting negative impact on the broader market. US yields changed less than 2 bp with the 5-y declining 1.6bp and the 30-y rising 0.5bp. Remarkably, the 10-y real yield declined 5.9 bp. German Bunds slightly outperformed Treasuries with the curve bull flattening, probably due to investor caution ahead of the ECB meeting (2-y -0.1bp; 30-y -2.1bp). The relative calm on the bond market supported equities on both sides of the Atlantic (Dax in record territory +0.75%, Dow +1.46%, Nasdaq little changed). The USD rally halted, but any correction remained modest, with EUR/USD closing at 1.1927 (DXY close at 91.82). EUR/GBP held a tight range near recent lows (close 0.8561).
Asian equity markets mostly profit from the constructive sentiment in the US yesterday. Chinese markets again outperform. The CSI 300 now shows tentative signs of a bottoming out process after a 15% decline over the previous month. The dollar (DXY 91.85) is holding basically stable. As was the case recently, USD/JPY is again well bid in Asia (108.75), but often these gains couldn’t be sustained in US dealings. US yields are marginally higher this morning. The yuan rebounds slightly (6.4975) but is holding within its recent tight range. AUD/USD (0.7755) rebounds modestly, supported by a rebound in some cyclical commodities (iron ore, copper).
Three topics are in focus for global trading today: US jobless claims, a $ 24bn 30-y US Treasury auction and the ECB policy decision/press conference. US jobless claims are expected to decline gradually further from 745k to 725K. Such an outcome won’t change markets’ (and the Fed’s) assessment on the US labour market. US auction this week had no further negative impact on the bond market. Still, the details of yesterday’s 10-y auction shows that the demand-supply balance remains fragile. The rise in US yields is taking a pause, but a sustained decline in LT yields probably isn’t that evident. Most attention will go to the ECB policy decision. The ECB will most likely keep its policy framework (policy rates, asset purchases) unchanged. Its probably too early for the bank to announce a prolongation of PEPP purchases beyond March 2022. The new staff projections should support the view that an inflation uptick will be transitory. At the press conference, markets will look for a (clear) assessment on the recent rise in yields. Is any rise in nominal yields considered an unwarranted tightening of monetary conditions or is the ECB also looking at the development of the real yield? And if a rise is considered unwarranted, how specific will the ECB be on its flexible approach? We expect any ECB guidance to remain at a rather general level. In that scenario, it probably won’t be that evident for the 10-y German yield to sustainably return below the -0.34% technical reference. On the FX market, the dollar rally took a pause, but its too early to call of the recent USD uptrend. As long as EUR/USD stays below 1.1952, the picture of the cross rate looks fragile. EUR/GBP yesterday didn’t go anywhere. Still the 0.8541 2021 low stays within striking distance. Maybe the prospect of next week’s BoE meeting might cause some more wait-and-see behaviour after the recent sterling rally.
News headlines
Taiwan is at risk being labelled a currency manipulator by the US, its central bank governor Yang said before parliament. The country met three main US criteria, including the amount it spent on currency intervention in 2020. Yang doesn’t expect Taiwan to be subject to the so-called section 301 that could eventually lead to tariffs however, as the country’s strong currency is also the result of the US’s very easy monetary policy.
Australia unveiled a A$1.2bn support package for its beaten-up tourism sector today. It is designed to keep the crucial sector afloat until foreign tourism is allowed again by boosting local travel for the time being. Australian tourism generated some A$61bn in 2018/2019 GDP and employs around 5% of the country’s workforce.
