Markets:
The sell-off in US Treasuries which started in the second half of last week, stopped today. US yields shed up to 1.5 bps (30-yr) in a daily basis. Technically, the US 10-yr yield trades just above first resistance at 1.32%, up from 1.12% last week (test of July low). The upcoming US mid-month refinancing operation, a slew of Fed speakers and a fresh US CPI print all suggest more weakness for Treasuries ahead. The supply operation starts tonight with 3-yr Notes, but culminates into probably tougher 10yr Note and 30-yr Bond deals on Wednesday and on Thursday. Headline CPI is expected to stabilize around 5.3% Y/Y in July. Last month’s figure barely impacted trading in the context on the ongoing bull run. This time could be different though since sentiment towards bonds made a turn for the worse after last week’s very strong non-manufacturing ISM and payrolls. The combination of high inflation and an improving labour markets provided fresh ammo for (hawkish) Fed governors lurking at the September meeting to announce the start of slowing down net asset purchases which are currently still running at a monthly pace of $120bn ($80bn of which are US Treasuries). Cleveland Fed Mester will later today surely join the chorus of Atlanta Fed Bostic and Boston Fed Rosengren yesterday when she discusses inflation risks. The dollar remains in control in FX space. EUR/USD yesterday closed below the July low of 1.1752 and is currently drifting towards the year-to-date low of 1.1704. A test is unavoidable but chances on a break lower increasing if weakness in US Treasuries effectively persists. The tradeweighted greenback (DXY) currently tests the July top of 93.19 with the YTD high standing at 93.44. Sterling today rose to its strongest level against the single currency since March last year (EUR/GBP 0.8460). Next strong support (2019/2020 low) stands at 0.8277/0.8282. The same drivers are currently at work as in EUR/USD. Both the BoE and the Fed embraced or are near embracing the need for some gentle policy normalization in order to sustainably achieve policy goals whereas the ECB remains on the side-lines.
News Headlines:
Czech inflation surged more than expected in July, by 1% M/M and 3.4% Y/Y. The yearly reading matched the highest in over a year, up from 2.8% Y/Y in June and beating 2.9% Y/Y consensus. The Czech National Bank last week raised its repurchase rate for a second straight meeting by 25 bps to 0.75%. The biggest influence on Y/Y price growth came for the third consecutive month from prices in transport, where prices of fuels and lubricants for personal transport equipment increased by 18.5%. Next in the order of influence were prices in ‘alcoholic beverages and tobacco. Prices of electricity decreased by 3.4% and natural gas by 4.7%. Prices of goods in total and services went up by 2.9% and 3.9% respectively. The Czech Koruna briefly spiked higher on the release, but couldn’t hold to gains. EUR/CZK currently trades near opening levels of 25.36.
Hungarian inflation slowed more than forecast in July, rising by 0.5% M/M and by 4.6% Y/Y, but down from 5.3% Y/Y in June and below 4.8% Y/Y consensus. Inflation is still above the 1% tolerance band around the MNB’s 3% inflation target. Food prices rose by 3.1% Y/Y while alcoholic beverages and tobacco prices are up 11.1% on average. Consumer durables and services are up 3.8% Y/Y and 2.9% Y/Y respectively. The Hungarian central bank already raised its base rate two consecutive times by 30 bps (currently 1.2%) and meets next on 24. August  The forint trades a tad stronger in a daily perspective at EUR/HUF 352.50.
German ZEW expectations fell for a third month in a row in August (from 63.3 to 40.4 vs 55 expected). ZEW President Wambach says that it points to increasing risks for the German economy, such as from a possible fourth COVID-19 wave starting in autumn or a slowdown in growth in China. The persistent improvement in the current assessment (29.3 in August from 21.9 vs 31 expected) adds to weakening expectations because of higher growth already achieved.
