Markets
Wall Street’s Wednesday post-FOMC sell-off spilled into Asian and European trading yesterday. Main European indices lost over 1.5%. Car makers were amongst the underperformers following reports from Toyota and Ford that they would (partially) halt production in a couple of months because of the continued lack of semiconductor supply. Supply chain constraints remain a major issue which risk hitting other sectors too (construction?) and via higher prices turn consumers more cautious. It shouldn’t surprise that growth slows following record-breaking quarterly dynamics, but the spreading Delta-variant and its potential economic consequences add another layer. What would worry us the most is that consumption effectively grinds to a halt because of the inflation levy, resulting in a stagflationary rather than a reflationary world. For now, that’s a wildcard but not our base scenario.
Core bonds’ performance was rather disappointing given the amount of risk aversion. In the case of German Bunds, this lethargic trading pattern has been going on for some weeks now. In case of US Treasuries, underlying details show the combination of bottoming out US real yields with topping off inflation expectations. The latter suggests that Fed policy normalization at least balances growth fears for now. The US yield curve flattened in a daily perspective with yield changes ranging between +0.4 bps (2-yr) and -2.6 bps (30-yr). German yields lost 0.3 bps (2-yr) to 1.7 bps (30-yr), bull flattening the curve. The US dollar and the Japanese yen hang in the balance as star performer in the risk-off climate. The trade-weighted dollar in any case pierced through the previous YTD high (93.44), paving the way for the November top of 94.30. If confirmed today, it strengthens the break south in EUR/USD (1.1704/1.1695) as the single currency fails to strengthen its back. EUR/USD closed at 1.1675. Commodities and commodity-related currencies were amongst the underperformers yesterday.
Asian stock markets lose more ground this morning with China significantly underperforming (-2.5%) as the government broadens its regulatory grip once more (see below). Commodity markets tentatively recover from yesterday’s beating. The eco calendar is empty, giving way for risk sentiment to once more set the general trading tone. Apart from that, the countdown to next week’s Jackson Hole symposium (Aug 26-28) will intensify. Will Powell give the official go-ahead for a September tapering announcement?
News headlines
Japanese national CPI inflation fell -0.3% y/y in July. That’s less than the expected -0.4% but follows a huge revision of the June figure from 0.2% to -0.5%. This, however, is the result of a change in the base year (2020 instead of 2015) which weighed down all 2021 CPI readings from January to June. Core inflation fell -0.6% (-0.8% expected), a slower decline compared to the revised -0.9% the month before. Regardless of the statistical issues, CPI clearly remains well below the central bank’s 2% target, the Bank of Japan will need to maintain its very easy policy stance for the foreseeable future.
China further tightened the screws on big tech in order to curb their influence on society. The country has passed legislation that toughens rules for how companies handle user data. According to earlier drafts, tech firms would be required to get user consent to collect, use and share information while also providing a way for them to opt out. The new law goes into effect September 1st. The new privacy (and other recently approved) rules could severely hurt several online services offered by Chinese tech companies that rely on big data to target consumers and capture their (buying) behaviour. A strong selloff wave rolls over to Chinese (tech) stocks this morning.
