Markets
European/German bond yields reversed much of Thursday’s ECB-driven slump on Friday in a relatively quiet session without economic data or headline events scheduled. By doing so, the 10y variant (+3.1 bps) prevented a close outside the upward sloping trend channel (-0.33%, above -0.35% support), keeping the technical picture clean. The advance came on the back of inflation expectations. Other tenors finished 2.3 bps (5y) to 3 bps (30y) higher. US yields also grinded higher on Friday after tanking in the wake of an exceptionally strong 30y auction on ECB-day. The major difference however, was that real yields were responsible for the bear steepening. US rates jumped up to 4.5 bps in the 10y, holding the upward sloping supporting trendline intact. The difference in yield dynamics together with a shaky risk sentiment (WS <1% in the red) favoured the USD over most majors. EUR/USD gave up support at 1.1826 to finish at 1.1814. USD/JPY finished just south of 110. Sterling built on Thursday’s technical break, eking out another gain vs the euro. EUR/GBP could limit losses to 0.854 however, thanks to the overall climate of risk aversion.
Asian markets are bathing in a sea of red this morning. Chinese tech in particular again tumbles after a report that China seeks to break up Alipay, a key digital player. Stocks shed more than 2% (HK, China). Core bonds inch higher in a typical risk-off trade. The US greenback together with the Japanese yen have the advantage on FX markets. EUR/USD slips sub 1.18 again.
And we expect the dollar to keep the upper hand in the short term. Today’s economic calendar is empty but tomorrow we’re getting US CPI numbers for August. They will serve as valuable input for the Fed when it has its FOMC meeting on September 22. Another high reading will reassert/jolt taper expectations, supporting core bond/US yields. For today we’re looking at EUR/USD 1.1782 as a first minor support area, followed by 1.1752. Sterling wasn’t much affected by last week’s industrial update but that may be different this week with the labour market report and CPI inflation due tomorrow and Wednesday respectively. EUR/GBP for now has given up testing the 0.86 zone.
News headlines
According to people familiar with the matter, a draft US tax plan circulated on Sunday. Democrats in the House of Representatives proposed concrete steps to raise $ 2.9 trillion in taxes to fund president Biden’s plans on additional social spending. The US corporate tax rate would be raised from current 21% to 26.5%. The latter is lower than the 28% level initially proposed by president Biden. Democrats are also expected to propose a surtax of 3.0% on individual income above $5 million. The draft was also said to include a rise on the capital gains tax from 20% to 25%. This is also less than initial proposals. The top individual tax raised is considered to be raised to 39.6%.
In a statement on its website, the National Bank of the Czech Republic took notice of the higher than expected August inflation data published on Friday. Headline inflation rose to 4.1% Y/Y, well above the CNB’s 2.0% target with a 1.0% tolerance band. Inflation adjusted for the first-round effects of changes to indirect taxes rose by 3.9%Y/Y. The August inflation figure also exceeded the CNB current forecast by 1.0%, with the deviation mainly due to a faster rise in core inflation and in inflation of food prices. The CNB still expects inflation to to ease gradually at the end of this year. However, domestic price pressures will continue to rise slightly for some time yet, mainly on the back of increased consumer demand and a gradual pick-up in wage growth. The CNB concludes that the published figures represent a significant inflationary risk to the CNB’s current forecast, which is tilted to a more pronounced increase in interest rates compared to the outlook so far. Yield on the Czech two year government bond rose from 1.57% to 1.63% on Friday. EUR/CZK tested the 25.30 barrier, but no sustained break occurred yet.
