Markets:
It feels like the day after on markets. The CPI print stopped the rally higher in US yields and the dollar, but didn’t spark a big countermove neither. Now we’re stuck in no one’s land just below the recent best levels. A second tier eco calendar couldn’t inspire. The chorus of (regional) US central bank governors is known by now. US Treasuries still marginally underperform German Bunds in the run-up to tonight’s $27bn 30-yr Bond sale which wraps up the US Treasury’s mid-month refinancing operation after a solid 3-yr and a stellar 10-yr Note sale. US yields add 0.2 bps (2-yr) to 2 bps (20-yr) in a daily perspective. German yields add 0.4 bps (2-yr) to 1.6 bps (10-yr). 10-yr yield spreads vs Germany narrow by 2 bps.
Main FX markets showed a similar fatigue. EUR/USD traded in a 1.1725-1.1745 trading range after bouncing off 1.1704 support yesterday. If anything, the balance is tipping in favour of the greenback at the start of US dealings. We hold our view that the dollar will likely remain strong in the run-up to the Jackson Hole Symposium at the end of the month. EUR/GBP trades in a similar slim trading range (0.8460-0.8480). UK Q2 GDP (4.8% Q/Q) printed bang in line with expectations and failed to give sterling fresh momentum. The post BoE move stranded near EUR/GBP 0.8470 support for now. An intense test is ongoing, but the support zone still holds.
News Headlines:
The Turkish central bank kept its policy rate for fifth month running unchanged at 19%. The CTRB thereby withstood pressure from Turkish president Erdogan who wanted to see a rate cut in July or August. The central bank had no other choice since Turkish inflation spiked to 18.95% Y/Y in July while the CTRB vowed to keep real rates positive. The policy statement gave no hints whatsoever on the next rate move. However, if base effects fade towards the end of the year and inflation tops out, political pressure will probably leave the central bank with no other option but to deliver some policy easing. Disobeying Turkish President Erdogan over the past years turned out to be reading your own exit as central bank governor. Short term, the Turkish lira profited from the CTRB’s perseverance. EUR/TRY trades at 10.06, compared with yesterday’s close near 10.14.
The International Energy Agency cut its 2021 global oil demand forecasts by 100k barrels a day while upgrading its 2022 forecast by 200k barrels a day. Oil demand will then return to pre-pandemic highs in H2 2022. The near-term downgrade is due to the economic impact of the Covid-19 Delta variant and rebounding output. The combination suggests that global demand will no longer significantly outstrip supply. OPEC – in a separate report – upgraded supply growth estimates for non-cartel counterparts for both 2021 and 2022 (+840k barrels/day). Brent crude hovers north of $71/b. Oil prices yesterday dipped briefly after the US called on OPEC+ to more rapidly return oil to the market.
US producer price inflation surged by 1% M/M and 7.8% Y/Y, the fastest yearly pace in slightly over a decade. High commodity prices, transport costs and supply bottlenecks thus remain a problem which adds to the cost pressure at companies. Almost 75% of the spike in the July PPI reflected a record 1.1% increase in services. Core PPI, excluding volatile components like food, energy and trade, surged by 0.9% M/M and 6.1% Y/Y. US weekly jobless claims fell back to 375k last week, slightly above the 368k, but confirming the upbeat news coming from last month’s payrolls. Continuing claims declined to 2866k, the lowest level since mid-March last year.
