Markets:
European bonds opened with additional losses in a catch-up move with US Treasuries’ continuing decline on Thursday evening. Throughout the day, both German Bunds and US Treasuries treaded water near sell-off lows. Rewind to this week’s earlier events: the Fed on Wednesday evening paved the way for a slightly more aggressive policy normalization campaign than anticipated. It took bond investors a night’s sleep before the message hit. But when it hit, it hit hard. From a technical point of view, the US 10-yr yield pierced 1.37% resistance which is 38% retracement of the April/July decline and was tested already 4 times before. The US 10-yr yield today tried to take out 50% retracement on that same move at 1.45% but so far without success. Daily US yield changes currently vary between -1.3 bps (5-yr) and +0.1 bp (2-yr). The German 10-yr yield today trades north of 62% retracement of the May/August slide (-0.24%). A sustained break higher would be highly relevant and suggests a medium term return to the YTD high at -0.07%. German yields add up to 2.3 bps (30-yr) in a daily perspective. We connect the Bund repositioning to last week’s FT rumours on ECB policy. They suggested a 1.8% inflation forecast for 2024 in internal documents, implying that the ECB will follow other big central banks faster than many thought. Next week’s ECB forum on Central Bank, ordinarily held in Sintra (ring a bell?!) with topic “Beyond the pandemic: the future of monetary policy” serves as a potential platform to soft sound how 2022 ECB policy could look like. Winding down asset purchases is obviously the first step, but it’s worth noting that the Euribor 3-month strip curve bear steepened since the Fed meeting with contracts from 2024 trading some 10 bps higher already. The zero flip point now is September 2025 from March 2026.
European stock markets lose up to 1% today. Yesterday’s real rate shocker bites. The real rate dynamic in combination with a tougher risk climate supports the dollar. EUR/USD returns to the low 1.17-area. We remain cautious in joining the USD-momentum ahead of German elections. A SPD victory and possibility to ditch CDU/CSU in the next government, could pave the way for some German reflation vibes as it opens the door for some more fiscal spending. Other European nations tend to copy/paste the German playbook. Sterling today returns some of the post-BoE gains in the risk-off market setting. EUR/GBP changes hands at 0.8560.
News Headlines:
The composite economic sentiment indicator as published by the Czech statistical office (CSO) declined for the third consecutive month from 98.6 to 96.2. Sentiment eased both among business and consumers. On the decline in business sentiment (95.3 from 97.1), the CSO mentioned that activity is negatively affected by a lack of key components in industry (92.7 from 97.1) and construction (111.6 from 116.4) and fast-growing prices of building materials. Especially, the situation in the car industry is said to be extremely severe as companies have to restrict or even suspend production. On the other hand, sentiment in trade (103.6 from 102.4) and services (95.3 from 94.2) improved. Consumer confidence declined from 106.0 to 100.7, as citizens are worried that rising prices might negatively affect their future financial situation. The Czech krona today declines slightly (EUR/CZK 25.41), but resists the rise in core yields rather well. The CNB decides on policy rates on Thursday next week.
In a regular report on financial Stability, the South Korean central bank warned on the risk of an ever growing household debt. In the second quarter, the debt-to disposable income ratio for South Korean households rose 10.1 ppt from a year earlier to 172.4%. Vulnerable households could face substantial debt repayment burden as interest rates start to rise. The report also said “Funds concentrated into the asset market, as well as rapid home price increases, could bode ill for financial stability when market sentiment of economic entities rapidly change due to internal or external shocks”
