Markets
Core bond yields collapsed again at the start of the new week. Without a specific trigger but in an outright risk-off mood, US bond yields shed 1.4 bp (2y) to 8.4 bps (30y) in another aggressive bull flattening. The 10y yield (1.212%) tumbles more than 7 bps and is on the verge of closing the February gap that opens at 1.21%. Volumes are a bit lower compared to Q1 and Q2 but are actually higher compared to the same period last year. So liquidity elements don’t cover today’s moves completely. Looking at rate dynamics, it’s both inflation expectations and real yields that drive the decline with the latter nearing the previous all-time lows of -1.11% (US 10-y). Lingering growth worries thus are currently the best explanation one can offer. The delta variant of the coronavirus that is for example pushing daily cases in the UK beyond 50 000 is often referred to as the reason why. The idea of a policy mistake by the Fed by hiking rates faster than markets expected in a way the dot plot suggested mid-June is gaining traction as well. Either way, it’s impressive. German Bund yields got caught in the slipstream with the curve flattening more than 5 bps at the very long end. The 10y yield over there is testing intermediate support at -0.38%, the final hurdle before returning to the February gap that opened around -0.42%. It’s Freedom Day in the UK but the happiness and joy isn’t shared by UK financial markets. Gilt yields tank a whopping 8.7 bps at the 30y tenor. Comments from BoE’s Haskel (see below) conflict with views expressed by Saunders and Ramsden last week and are obviously no help either. Stocks are being dumped. European losses mount to almost 3% with cyclicals leading the decline. WS gives up 1.3% in all three of the major indices. Commodities are drowning: copper is 3% down, oil is closing in on a 4% loss.
The usual suspects on the FX market gain on days like these, with in the first place the Japanese yen soaring. USD/JPY held up well initially but bowed to pressure eventually, slipping from 110 to 109.27 currently. EUR/JPY forfeits 130 support to change hands at around 129.09. The dollar is doing well but the euro’s show of strength at the start of US dealings is nothing but remarkable. EUR/USD totally reversed early losses to trade even higher at 1.182. Sterling is being sold easily, along with other smaller currencies (including the NOK, CAD, AUD and NZD). EUR/GBP jumps beyond 0.86, escaping the downward trend channel.
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Labour market data as published Polish Central Statistical Office indicate the economic rebound continues to feed through into the labour market. Employment rose 0.3% M/M to be up 2.8 Y/Y (from 2.7% in May). Average gross wage growth strengthened with 2.9% M/M to be up 9.8% Y/Y. Both data were slightly above market expectations. Today, NBP member Eric Lon was quoted from an article at wGOSpodarce.pl that he favours to keep the policy rate unchanged until the November inflation and growth forecast will be available. If the November projections would indicate inflation staying longer above the upper end of the tolerance than in July, he indicated that the NBP might consider taking action. Still, the NBP should still take into account the situation with respect to economic growth. The zloty today extends its recent decline. However, at EUR/PLN 4.59, PLN- losses are modest given the overall risk-off sentiment.
After more hawkish comments from BoE members Saunders and Ramsden last week, MPC member Haskel today sounded more dovish. “In the immediate term, the risk of a pre-emptive monetary tightening curtailing the recovery continues to outweigh the risk of a temporary period of above-target inflation”, Haskel said in a speech at the University of Liverpool. He admits that inflation can go above 3%, but said that these ‘price pressures and erratic data readings should be temporary and therefore could be looked through’. Aside from the impact of the Delta variant he also sees fiscal tightening as a headwind for the economy. The debate on the August BoE policy meeting remains open and the outcome inconclusive.
