Markets
The better the US eco data get, the more adverse the market reaction becomes. It fits with the view that markets turned into reflation hibernation at the start of Q2 2021. Markets finally aligned with the Fed’s message not to frontrun on policy normalization any time soon. The US 30-yr yield already fell below the lower bound of the steep upward trend channel since the start of the year and now falls below the neckline of double top formation at 2.26%. A break which came after a batch of very impressive US eco data! The final target of the double top formation stands at 2.07%. A similar dynamic is at play at the 10y tenor which extensively tests 1.59% support; the neckline of a double top with final target at 1.41%. The US yield curve bull flattens in a daily perspective with yields falling by 0.2 bps (2-yr) to 5 bps (30-yr).
Before turning to the FX markets, let’s briefly zoom in on the data. Weekly jobless claims fell from 769k to 576k, by far the lowest level since the start of the pandemic and way below 700k consensus. Confidence indicators surged to a multiyear high for the Empire Manufacturing gauge (26.3 from 17.4) and a multidecade high for the Philly Fed Business Outlook (50.2 from 44.5). Production levels and new orders are booming with firms stepping up hiring to keep up with demand. On top, companies expect an even rosier future. Price pressures keep building especially on the input side. US retail sales increased by a breath-taking 9.8% m/m in March as business reopened and US citizens received another government pay-out. The narrower retail sales control group, used as a proxy for consumptions in GDP, rose by 6.9% m/m.
The US dollar at first reacted disorderly as well, dipping in parallel with US yields. However, the FX market soon returned to levels from before eco releases. EUR/USD currently changes hands around 1.1975 after failing to take out key 1.1990 resistance on first attempt. We argued earlier that euro strength should enter the EUR/USD-equation before such break is possible. Yesterday’s increase in European (real) yields – breaking with the US intraday pattern – was hopeful, but didn’t persist today. On the contrary, the German yield curve bull flattens as well with yields losing 0.2 bps (2-yr) to 5.7 bps (30-yr). The single currency today even underperforms amongst all majors with EUR/JPY and EUR/GBP also failing to take out 130.69 and 0.87 resistance respectively.
News Headlines
In his first policy meeting, fresh CBRT governor Kavcioglu kept rates steady at 19%. Kavcioglu took over from Agbal, who was sacked by Turkish president Erdogan for raising rates to battle inflation. Kavcioglu previously said a rate cut at the April meeting was not “a given”. He did however abandon hawkish language in the statement, omitting a pledge that monetary policy could tighten further if needed. The Turkish lira retreated from earlier gains in the wake of the policy statement. EUR/TRY is trading near 9.68. This compares to the 8.59 on Agbal’s final day in office.
What was in the air already this morning, became official: the Biden administration has imposed sanctions against Russia over alleged election meddling and misconduct related to the SolarWinds hack. Amongst others, the US is barring its financial institutions from participating in the primary market for new debt issued by the Russian entities including the central bank, Finance ministry and sovereign wealth fund. It is considered the “nuclear option” as about one fifth of Russian debt is held by foreigners. Both Russian bonds and the ruble took a blow after this morning’s rumours but have pared some of the losses in the meantime. The US has threatened with more sanctions over Russia massing troops on the Ukraine border.
