Markets
Both the dollar and sterling held their advantage over the single currency yesterday even if last week’s intense trading dynamics slowed. EUR/USD came within a whisker of the 1.1704 YTD low, but a real test didn’t occur yet. A break below the zone 1.1695/1.1704 would be highly relevant with the former being 38% retracement on the 2020 EUR/USD rally. Next support stands at 1.1603 (Sep/Nov 2020 dip) and 1.1493 (50% retracement). Today could already be the day for USD with July CPI inflation readings scheduled for release. Consensus expects more or less stabilization for both the headline number (5.3% Y/Y from 5.4% Y/Y) and the core reading (4.3% Y/Y from 4.5% Y/Y). 5%+ inflation prints in previous cycles triggered heavy selling in both bonds and stocks as they awakened the inflation bogeyman. The damage for bonds remained very much contained in May (5%) and especially June (5.4%) against the background of a stellar bond bull run. Things might be different this time around though as a very strong non-manufacturing ISM and payrolls managed to trigger profit-taking on US Treasuries. Especially a CPI beat wouldn’t go unnoticed. Theory at this stage of the cycle suggest a bear steepening as a market reaction, though over the past months we noticed markets already shifting into a bear flattening mode. We are eager to find out if that remains the case after the significant setback in (LT) US yields over the course of June & July. US Treasuries yesterday in any case continued to underperform German Bunds. US yields added 1.8 bps (2-yr) to 3.1 bps (5-yr) in a daily basis. The US 10-yr yield passed a first important technical mark by moving north of 1.32%. This ends the downtrend in place since mid-May. German yields ended only 0.2 bps to 0.4 bps higher on the day. The dollar is one of the main beneficiaries as mentioned above and will take a swing at the 1.17 big figure which is clearly at high risk of a break lower. Chicago Fed Evans argued that it’s too soon to take a tapering decision and wants to see some additional labour market reports. He did add that it’s only a question of months with the call to be made ahead of the end of the year. Evans is on the dovish side of the aisle which risks being outnumbered by the September FOMC meeting. Other eyecatchers yesterday included a solid 3-yr Note sale to kickstart the Treasury’s mid-month refinancing operation and the anticipated acceptance of the infrastructure spending bill by US Senate (see below). The former preludes probably tougher 10y Note and 30y Bond sales today and tomorrow while the latter still managed to push the S&P and Dow to fresh all-time highs. Asian stock markets trade more mixed this morning with Japan outperforming.
EUR/GBP narrowly closed below the previous YTD low (0.8472), briefly touching 0.8450 for the first time since March last year. A sustained break by the end of the week paves the way to the 2019 low of EUR/GBP 0.8277 with a front-running Bank of England being the key driver. Today’s UK eco calendar is empty with UK investors eyeing tomorrow’s Q2 GDP print.
News headlines
US President Biden scored an important win after the US Senate yesterday overwhelmingly passed a roughly $1tn infrastructure package with broad bipartisan support. All Democrats in the split Senate voted in favour with 19 Republicans joining them, resulting in a 69-30 vote. The WSJ reports that the package includes $550bn in spending above previously projected federal levels: $110bn would go toward roads and bridges, $66bn to rail, nearly $40bn to transit, and $65bn to expand access to broadband. Budgets are also made available to avoid the worst consequences of climate change and becoming more resilient to cyberattacks. The infrastructure bill now moves to the Democratic-led House, where speaker Pelosi threatened to delay taking up the issue until the Senate also passes Biden’s $3.5tn antipoverty and climate plan.
