Markets
Core bonds remain (remarkably) well bid as investors await more explicit guidance from the ECB and the Fed on the start/timing of (gradual) tapering of bond buying. Eco data (EMU Q1 GDP revision, ZEW confidence, NFIB small business confidence, and US JOLT openings) confirmed that the reopening of the economy is gaining traction. At the same time, supply and labor market bottlenecks are still resulting in additional price pressures. US JOLT job openings jumped to a record 9.3 mln! Yesterday’s data for sure weren’t the most important ones. Even so, the data evidence is a bit at odds with a further easing of inflation expectations driving the setback in yields. Both the German and US yield curves bull flattened. German yields lost between 0.5 bps (2-y) and 3.0 bps (30-y), with the 10y yield (-0.22%) is now testing the key -0.25%/0.20% support area. US yields eased between 0.4 bps (2-y) and 3.6 bps (10-y). The $58 bln 3-y Note auction went smooth. The US 10-y yield is testing final intermediate support near 1.53% ahead of the 1.47% May spike. The 10-y US real yield was little changed (-0.85%). Overall low volatility and easing financial conditions are keeping US and European equity indices near record/cycle highs. The question of course remains how long this ‘perfect world’ for risky assets will persist. The congruent decline in US and EMU yields and stable US real yields also translated in mainly directionless USD trading. The trade-weighted USD (DXY) struggles not to fall below the 90.00 marks. EUR/USD (close 1.2173) for now stays away from the 1.22 big figure. Sterling felt pray to temporary intraday weakness, but in the end, EUR/GBP again closed near 0.86.
Asian equities mostly show modest losses this morning with China slightly outperforming even as Chinese PPI price pressure rose faster than expected in May (cf infra). The yuan is holding stable near USD/CNY 6.3950 as is the dollar (DXY 90.09). Brent oil is setting a new post-corona top ($72.50 p/b area). Even so, US Treasuries easily maintain recent gains. Today’s eco calendar is almost empty. Bond investors will continue to count down to tomorrow’s ECB policy meeting. We assume that quite some ECB softness should be discounted after the recent bond rally. The US 10-y auction is a wildcard. Also, keep an eye at the policy decisions of the Bank of Canada and the National bank of Poland. The former already indicated its intentions to reduce policy stimulus at the April meeting. Some wait-and-see message might be on the cards today. The recent sharp rise in inflation might push the NBP to change its narrative on the ultra-easy monetary policy and on its preference for a weak zloty. Despite recent NBP comments, the majority of most likely won’t support the case for an early rate hike.
News Headlines
Chinese consumer and producer price inflation both accelerated in May. CPI rose from 0.9% y/y to 1.3% y/y, but PPI drew most attention by surging from 6.8% y/y to 9% y/y. The latter is the highest factory-gate inflation since 2008. The gap between PPI and CPI is the largest since 1993 with producers expected to at least partially pass the cost to the consumer later this year. The continuing rally in commodity prices is one of the key PPI drivers. Chinese policymakers are for example considering imposing caps of coal prices and expanding supply while cracking down on speculation and hoarding. Clogged international supply chains also add to the PPI pressure. In that respect, more trade disruption can be expected as activity at the huge container terminal in Shenzhen is currently significantly diminished because of harsh contingency measures to tackle a Covid-outbreak in southern China.
US President Biden and Republican senator Shelley Moore Capito ended their efforts to strike a bipartisan compromise on infrastructure talks after weeks of negotiations. White House press secretary Psaki indicated that Biden was willing to reduce his $1.9tn infrastructure plan by more than $1tn, but that the Republican group had only increased their proposed investments by $150bn. A new round of talks with eight moderate senators will follow in the coming weeks. Without a bipartisan deal, Biden will likely try to sail his plans through Congress trying to capitalize on the waiver-thin margins Democrats have if they vote across party lines…
