Markets
In absence of US traders (Labour Day Holiday) and with Thursday’s ECB meeting luring, markets treaded water during this week’s opening session. EUR/USD closed at 1.1870 from an 1.1882 open and following Friday’s first test of 1.1909 resistance. Changes on the German yield curve varied between flat (5-yr) and -0.8 bps (30-yr). The German 10-yr yield remains just below the twice tested -0.35% resistance level (38% retracement on the decline between May and August). (European) stock markets were in better shape than last Friday, recording gains of up to 1%.
Most Asian equity indices are positively oriented this morning with Japan outperforming (+1%) and Korea (slightly negative) underperforming. The Japanese action might be contributed to next PM-candidate Kishida’s pledge for a >¥30bn stimulus package to cushion the blow from the corona pandemic. USD/JPY trades listless near 109.80 though. August Chinese trade figures printed better than expected with exports surging to 25.6% Y/Y and imports to 33.1% Y/Y. Strong exports (despite a higher base for comparison) might indicate that this summer’s worries over a significant growth slowdown related to the spreading Delta-variant were overrated.
Today’s eco calendar is thin with only September German ZEW investor sentiment. Consensus expects the forward looking expectations component to drop to the lowest level since April 2020 while the current situation index is set to extend this year’s surge to the strongest level since December 2018. The ZEW-survey is unlikely to leave traces with the ECB meeting looming. ECB governors recently woke from hibernation with comments much more diverse compared to the one-toned dovish song of the past year-and-a-half. Upgraded september growth and inflation forecasts might be the cue to lower weekly PEPP purchases, especially since financial conditions loosened over summer months. Chief economist Lane suggested that the ECB has time to decide on how the transition period post-PEPP (March 2022 end date) will look like. Temporarily increasing the €20bn/month APP purchases is a possibility to avoid a sharp drop in bond buying given current +- €80bn/month PEPP purchases. Uncertainty ahead of the Frankfurt gathering might prevent breaks higher in EUR/USD and European rates. From the US side of the story, we eye the mid-month refinancing operation which starts with a $58bn 3-yr Note auction tonight and speeches by Fed governors in the run-up to the September 22 FOMC meeting (NY Fed Williams kicks off tomorrow evening).
News headlines
The Reserve Bank of Australia (RBA) left the cash rate as well as the 3y yield target at 0.10% today. Overall bond buying remains at a pace of A$ 4bn per week but has been extended until at least mid-February 2022 instead of November this year. The RBA said this reflects the delay of the recovery caused by the Delta outbreak. The economy is expected to grow again in the December quarter after contracting in the current as vaccination rates increase and restrictions ease. It should be back around its pre-Delta path in the second quarter of next year. Wage and price pressure remain subdued, the RBA added. Wage growth has to be “materially higher” for inflation to sustainably settle within the 2-3% target range. The cash rate won’t be raised until it has. The RBA estimates this condition will not be met before 2024. The Australian dollar in a first response inched higher towards recent highs around 0.747 but that move soon died. AUD/USD is currently trading slightly lower in the 0.742 area.
The UK extended the post-Brexit grace period for trade between Great Britain and Northern Ireland indefinitely, buying more time to discuss the NI protocol with the EU. The protocol stipulates that goods flowing from the rest of the UK to NI are subject to checks. The grace period for these border controls previously ended September 30. After that, a ban would come into force on the sale of chilled meats and fresh sausages to NI by the rest of the UK, leading to the dispute to be dubbed “the sausage wars”. The EU hasn’t formally agreed with the extension but said it would hold back from launching legal procedures “for now”.
