Markets
The hawkish Fed shock effect resonated from US dealings yesterday over Asian trading hours into the European session. Especially the new dot plot suggesting not one but two hikes in 2023 and already one next year served as a reminder that policy will have to be normalized sometime and perhaps sooner rather than later. Markets brought forward their Fed hiking expectations, and as a result of official Fed guidance, also the timing of tapering. The middle segment of the US yield curve added more than 10 bps and keeps most, if not all, of the yields gains today. The curve does flatten at the long end, where yields ease more than 4 bps (30y). The 10y yield (1.55%, -2.4 bps) remains north of 1.53% resistance but a test of the next reference around 1.6% is not yet happening. US (secondary) data (Philly Fed business outlook, jobless and continuing claims) were generally weaker than expected but have no meaningful market impact. European yields jump in a catch-up move. The Fed decision reminds markets of the fact that the ECB is probably going to have a similar “taper” discussion in the pivotal September meeting, regardless of what Lane proclaimed this morning. The ECB chief economist in a (vain) attempt tried to disassociate the Fed meeting from ECB policy going forward in comments by the break of dawn. He stressed both continents are in different situations and that it is unnecessary and premature to talk about the end of PEPP. He did describe the September meeting is an important one. The German yield curve bear steepens nonetheless with changes of around 3 bps (5y). The 10y rises more than 7 bps but a benchmark change makes it hard to evaluate the actual increase. The European 10y swap rate offers a better glimpse, advancing 1.7bps. Peripheral spreads vs. that German 10y tighten 3-4 bps.
The dollar extended yesterday’s strong run on European repositioning. EUR/USD easily gave up support near 1.1985 and was even headed for a test of the next reference at 1.1919 (61.8% retracement of the Q2 recovery run). We do add though that it’s overwhelmingly a strong dollar move and not a particularly weak euro. The currency pair is changings hands in the 1.194 area. EUR/GBP is also performing poorly, slipping further sub 0.86 to 0.856 after having touched support at 0.8541. That’s the weakest level since early April driven by sterling strength. Some investors are betting that the next in line to (announce to) normalize policy will be the Bank of England (at the August meeting?).
News Headlines
The Norges Bank unanimously decided to keep the policy rate unchanged at 0%. They changed their guidance for a first hike to the very specific September meeting. The policy path over the policy horizon is slightly higher and steeper than in March, peaking at 1.5% by 2024. Further easing of Covid-related restrictions will help a return to more normal economic condition with this year’s mainland GDP growth forecast confirmed at 3.8% and next year’s prognosis upgraded from 3.4% to 4.1%. Underlying inflation has slowed and is now below the 2% target. A stronger krone and moderate wage growth balance higher global inflation (expectations). Governor Olsen and co noted that a long period of low interest rates increases the risk of a build-up in financial imbalances. The Norwegian krone holds level with the euro near 10.15 despite the slightly more hawkish guidance by the Norges Bank. EUR/NOK’s downtrend between November and April turned into short term consolidation since May.
The Swiss National Bank kept its policy rate and interest on sight deposits at the SNB unchanged at -0.75% and remains willing to intervene in the FX market as necessary. The SNB still labels its currency as highly valued. New inflation forecasts – based at unchanged policy rates – stand at 0.4% for 2021 and 0.6% for both 2022 and 2023. The path is slightly higher than in March. GDP is forecast to accelerate in the 2nd and 3rd quarter with the 2021 full year forecast at an upwardly revised 3.5%. Risks to the outlook remain broadly balanced. The higher global yield environment lifts EUR/CHF above 1.09 today, but gains could probably have been bigger.
