Markets
Trading on FX and interest rate markets mostly remained order driven in a long drawn-out countdown to tomorrow’s Fed policy decision. Quite an impressive series of US eco data, including retail sales, producer prices, Empire State manufacturing survey, production data and NAHB home builders confidence in theory provided the final pieces for the Fed to fine-tune its policy assessment. However, the overall message from the data was mixed and doesn’t make things easier for the Fed. Activity data were tentatively weaker than expected. Monthly retail sales declined more than expected (-1.3% M/M headline, -0.7% M/M control group) but this decline followed a strong month of March and an upwardly revised April release. The US Empire State manufacturing survey eased from 24.3 to 17.4. Activity and order data are off recent peaks. Price subindices stay high but don’t accelerate further. Expectations remained constructive, including for the labor market subseries. May PPI prices again printed slightly higher than expected, both for the headline (6.8% Y/Y) as for some core measures (ex food, energy and trade 5.3% Y/Y, but the surprise was in line with last week’s CPI). The market reaction to the data was muted. US yields returned from red to green resulting in a modest curve steepening, with the 30-y rising 2 bp. The US 10-y yield returned to the 1.50% psychological barrier. German yields also stay in consolidation modus, rising up to 1.5bp. Peripheral bonds continue to profit from the low volatility environment with 10-y spreads versus Germany narrowing up to 2 bp for Greece and Portugal. The EU today launched its debut NGEU 10-y bond to finance its recovery fund. It raised €20 bln, well above earlier indications. The sale attracted €142 bln buying interest and printed at MS-2. (European) equities continue their gradual but protracted uptrend with the EuroStoxx50 touching another cycle top. This also applies for brent oil ($ 73.60p/b).
As is the case for interest rate markets, there is currently is no unequivocal narrative to guide USD trading. The dollar traded in the defensive in Europe with EUR/USD returning to the 1.2145 area, but fortunes reversed in favor of the greenback later. EUR/USD is changing hands in the 1.2120 area. The DXY index hovers near intermediate resistance at 90.60. USD/JPY is holding north of 110. Sterling didn’t profit from solid UK labour market data. The intraday USD rebound initially hurt sterling more than the euro, bringing EUR/GBP to the 0.86325 area, but this divergence faded. EUR/GBP is returned to well-known territory (0.8610 area). Tomorrow morning, the UK price data will be published (CPI, PPI).
News Headlines
Home price ratios are higher than they were ahead of the 2008 financial crisis, Bloomberg Economics reported. Based on a compilation of five indicators, it estimates the biggest bubble risks for New Zealand, Canada and Sweden. The report follows yesterday’s OECD analysis on the Australian housing market where it concluded that only in the three aforementioned countries house prices in the past 20 years rose faster. Bloomberg Economics identified several reasons for the steep increases; record low rates, fiscal stimulus, lockdown savings, limited housing stock and expectations of a robust economic recovery.
The Hungarian forint extends yesterday’s decline in the wake of MNB council member Pleschinger’s call for a quarterly rate hike pace – reducing the scope for quick tightening – and the abolishment of the 1-week deposit facility rate. EUR/HUF rises further north of 351 to trade at the highest (lowest for the forint) level since mid-May. There is a broader CE sell-off at play as well though with the Polish zloty also declining for a third day straight to 4.52 even as NBP MPC member Gatnar and Hardt repeated their calls for a “symbolic rate hike” and “gentle normalization” respectively. The Czech currency holds relatively strong, trading only a tad lower at EUR/CZK 25.46 as the tightening intentions by the CNB over there aren’t questioned so far.
