Markets
US Treasuries extended last week’s underperformance. A very strong non-manufacturing ISM and a near 1mn payrolls print prompted profit taking after a two month breath-taking rally. The move was driven by significantly higher US real rates, prompting a scare in for example gold prices. Bullion fell off a cliff in Asian dealings, testing the March/April lows subs $1700/ounce while still trading above $1850 last Wednesday. Some hawkish Fed comments added to yesterday’s weakness in US Treasuries, together with anticipation on another 5%+ US CPI print (on Wednesday) and on the US Treasury’s mid-month refinancing operation which features 10y and 30y sales on Wednesday and on Thursday. The US Senate will normally this week also pass a $1tn infrastructure package with significant Republican support. Returning briefly to the Fed: non-voting Boston governor Rosengren called for the start of tapering at the September meeting while voting Atlanta Fed governor Bostic called for tapering to start sooner than earlier expected with the scale of the reduction being larger than in previous episodes. He foresees a first rate hike very late 2022, implying a 2021 tapering start. The Jackson Hole meeting of August 26-28 will be a very hyped event! US yield eventually added 1.1 bp (2-yr) to 2.8 bps (7-yr) on a daily basis. The German yield curve flattened with yield changes varying between +0.8 bps (2-yr) and -0.9 bps (30-yr). The dollar enjoyed the higher US (real) rates) and reached its strongest level against the euro since early April. A EUR/USD 1.1737 close brings the YTD low of 1.1704 within striking distance. The Fed build-up, US CPI and upcoming supply all suggest that a test will be unavoidable. We expect US Treasury weakness and dollar strength to last today even if the eco calendar isn’t that enticing.
Sterling for a second straight session attempted a break below the YTD low of EUR/GBP 0.8472. A sustained move below paves the way for the 2019 bottom at 0.8277. The August Bank of England meeting triggered the latest sterling rally last week. The UK central bank unexpectedly adapted its forward guidance. For the past year, it sounded that the BoE would not even consider tightening policy “until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”. Actual inflation developments and another bump in inflation projections in the August Monetary Policy Report prompted a change to “some modest tightening of monetary policy over the forecast period ahead is likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term”. The hawkish shift in forward guidance was accompanied by detailed plans on how the unwinding of the balance sheet process would work. The BoE marked a policy rate level of 0.5% as threshold to stop reinvesting proceeds from maturing bonds of the £895bn QE bond portfolio. Previously, the BoE expected this process to stop at a policy rate level of 1.5%. The latter now serves as a cue to start additional portfolio selling. The Bank of England is now a clear market favorite to kick off G4 policy normalization. A first 15 bps rate hike is discounted by March 2022. This week’s highlight on the UK eco calendar is Thursday’s Q2 GDP release.
News headlines
US unfilled job openings rose more than expected in June, from 9.48 million to 10.07 million to another record high. The Labor Department said that the increase was driven by accommodation and food services, retail and professional and business services, in another sign that the easing of pandemic restrictions translates into broader economic activity. The gap between job openings and people who are unemployed (9.5 million) is positive since May and continues to rise. The quits rate, which indicates how fast people leave their jobs and is seen as a proxy for confidence in the labour market, ticked up to 2.7%, just below the all-time high of 2.8%.
