Markets
The aggressive repositioning on bond markets that took place last Thursday and Friday met with some counteraction yesterday and more or less quieted down today. The front end of the US yield curve underperformed sharply late last week as investors braced for faster-than-expected rate hikes. Money markets at the current juncture discount one hike at the turn of next year, which is even more hawkish than the dot plot – which nevertheless revealed that a (large) minority expects one rate hike already in 2022. The changed narrative keeps a bottom below short-term yields, although they ease slightly today (about 1.4-1.8 bps). The very long end of the curve continues yesterday’s underperformance after the outsized repositioning (or should we call it short squeeze?) at the end of last week (30y: +2.6 bps). US 10y yield ekes out a 1.4bps gain to 1.50%. First resistance lies at around 1.53%. The muted bond moves come ahead of Fed chair Powell’s testimony before Congress tonight, a whole slew of Fed speeches that could shed more light on the Fed’s way forward later this week and key data including PMI business confidence and the PCE deflator. German Bunds were under pressure in early European trading, with the 10y testing the correction high at -0.15%. Reuters, citing sources, reported that there is a general consensus the ECB could tolerate inflation exceeding its new goal, to be set at 2%. That would raise the bar for tightening/normalizing policy in the future even higher. In line with the US, the very long end of the curve underperforms, with the German 30y 2 bps richer.
FX markets also trade subdued, probably for reasons similar to the bond market’s. The US dollar is trading with a minor strengthening bias but moves are technically insignificant. EUR/USD is struggling to retain the 1.19 barrier. The trade-weighted greenback is holding near the recently conquered 92 area. EUR/JPY rises for a second day straight to 131.8 after touching the lowest level in one and a half month. USD/JPY is developing nicely within the upward sloping trend channel towards 110.68. Sterling shows resilience sub 0.86 ahead of PMIs tomorrow and the Bank of England on Thursday.
News Headlines
The Hungarian central bank raised its base rate as expected by 30 bps to 0.90%. The MNB will continue using its 1 week deposit facility, but removes the current 15 bps pick-up over the base rate. It’s the start of a cycle of interest rate hikes in order to ensure price stability against the background of upward inflation risks which risks de-anchoring inflation expectations. Rate hikes will only stop when the monetary council judges inflation risks as balanced and when actual inflation (headline currently 5.1% Y/Y) returned to the central bank target (3% with 1% tolerance band). Together with tightening interest rates, the MNB will continue using a flexible approach in its open-ended government securities purchase programme regarding the quantality and structure of weekly purchases. The Hungarian forint traded soft in the run-up to the decision but EUR/HUF fell from 356.50 to 353 in the aftermath. The Hungarian swap curve bull steepens in a buy-the-rumour, sell-the-fact move.
Reuters reports that a draft communiqué of the July 9-10 G20 meeting endorses the G7 proposal on the two pillars on the profit reallocation of multinational enterprises and the global minimum tax. The first pillar makes sure that international companies pay taxes in countries where they make profits instead of in tax shelters. The second pillar is a global minimum corporate tax rate in order to avoid a race to the bottom to lure investments from ltinationals.
