Markets
“I really want to finish the job and get back to a great economy”. Fed chair Powell stressed the uneven economic recovery during a virtual IMF panel to stick as long as necessary to the US central bank’s very accommodative monetary policy stance. Last month’s payrolls showed that a >8 million gap remains between American working ahead of the pandemic and Americans at work now. “We will not forget those people and we’ll provide the economy the support that it needs until that job is done”. Powell again easily set aside fears that such policy stance will work extremely inflationary especially in combination with the US government’s huge fiscal effort. The Fed Chair’s message added even more strength to the dovish message sent out by regional Fed governors and FOMC Minutes recently and extended the reflationary ceasefire.US Treasuries prolonged this week’s outperformance against German Bunds. US yields shed 0.4 bps (2-yr) to 7.2 bps (20-yr). The curve thus bull flattened compared to the outperformance of the belly earlier this week. From a technical point of view, 1.58% is first support for the US 10-yr yield. It’s the neckline of a possible double top formation (final target 1.39%). A break lower would also end this year’s accelerated yield increase and turn the technical picture more neutral. Daily changes on the German yield curve remained again constraint to -1 bp across the curve. 10-yr yield spreads vs Germany ended virtually unchanged with Greece and Italy (-2 bps) slightly outperforming. Stock markets thrived with main European and US indices ending 0.5% to 1% higher.
This month’s dollar slide continued in the calm market context where only Powell’s dovish message echoed. The trade-weighted greenback touched 92 for the first time since March 23. That’s first support, being 38% retracement of the Feb-Mar USD rebound. A break lower would be significant and pave the way to the low 91-area. EUR/USD managed a close above 1.19, but 38% retracement of the Jan/Mar stands at 1.1950 and isn’t threatened yet. USD/JPY closed at 109.26 from an 109.85 open. EUR/GBP 0.8645 resistance initially held even after NIRP comments by BoE Tenreyro, but eventually gave away during US dealings. EUR/GBP closed at 0.8675. The move higher has further to go from a technical point of view with next resistance kicking in around 0.8750. Today’s eco calendar again won’t be a game-changer with only US PPI data scheduled for release. It will be interesting to see how strong the reflation correction remains with FI and FX markets arriving at first important technical levels.
News Headlines
The US Treasury still plans to gradually reduce its cash balance as outlined at the last quarterly refunding despite the cash pile at the end of March being even higher than assumed, UST deputy assistant Smith confirmed. He added that they are “highly attentive” to how cash balance decisions affect money market conditions. US money markets are on the verge of turning negative due to liquidity gushing through the system. This could prompt action by the US central bank, earlier published Fed minutes suggested.
Clashes between Irish nationalists and unionists continued on Thursday night despite appeals by the Northern Ireland’s power-sharing government. A week of violence has been the worst in years and is seen as a result of Brexit. The Northern Ireland Protocol introduced a border in the Irish Sea for checks on goods entering the Irish isle coming from the British mainland. This came as a blow to unionists who were promised no such thing by PM Johnson.
France will only gradually shore up it’s pandemic-struck public finances, avoiding austerity that would hurt economic growth, a long-term fiscal plan showed. The budget deficit won’t decline below 3% until 2027. France plans to keep taxes unchanged and will limit annual spending increases to 0.7% on average over the course of the plan. To meet the targets, structural reforms including a pension system overhaul is needed, a government official explained.
