Markets
Core bonds recovered somewhat intraday, but US Treasuries slipped away towards the end of the US trading session. Several items played a role. First, the US Treasury’s $24bn 20-yr Bond auction went miserably. The auction stopped way through the 1:00 PM bid side with a below average bid cover. Second, Fed Quarles warned that ‘transitory’ high inflation doesn’t necessarily mean ‘short lived’. Inflation expectations risks getting out of hand because of longer-lasting supply-chain bottlenecks. He mentioned a risk from additional government stimulus which would boost demand and add to price pressures. “We can tolerate, if you will, an extended period of 2.5% inflation…much longer than we could an extended period of 4% inflation. If we are still seeing 4% inflation…next spring, then I think we might have to reassess the speed with which we would be thinking about raising interest rates.” On Tuesday, another member of the Fed’s Board of Governors -” Waller -” also cited the possibility to bring rate increases forward if inflation doesn’t cool by year-end. BoG Bowman didn’t make the link with the rate cycle, but also pointed out that inflation may last longer than expected. It’s an unusual spin that BoG members speak out so openly on risks to the inflation scenario and possible implications to monetary policy. Usually, it are the regional Fed presidents who share their (opposing) views to the central scenario. Finally, the release of the Fed’s Beige Book provided more anecdotic evidence pointing in the same direction. Input cost increases were widespread across industry sectors, driven by product scarcity resulting from supply chain bottlenecks, increased transportation costs, labor constraints and commodity shortages. Many firms raised selling prices and expect higher prices and supply shortages to last another year or so. The majority of Fed Districts reported robust wage growth. The US yield curve eventually steepened in a daily perspective with yield changes ranging between -1 bp (2-yr) and +4.9 bps (30-yr). The US 10-yr yield closed at its highest level since mid-May (1.65%). The German yield curve bull steepened with yields declining by 0.4 bps (30-yr) to 3.3 bps (2-yr) as selling pressure at the front end eased somewhat after this week’s earlier heavy hawkish repositioning. (Hawkish) Bundesbank President Weidmann’s unexpected resignation might have played at the margin. Yield dynamics didn’t really hamper the single currency’s attempts to retake EUR/USD 1.1664 even though they remain in vain so far. At the moment, the battle between EUR and USD is weak vs weaker. EUR/GBP treaded water just below the previous key support at 0.8450. Today’s eco calendar contains US weekly jobless claims, Philly Fed Business Outlook and EMU consumer confidence. More companies report earnings. Price increases are a common theme so far (eg Nestlé, Akzo Nobel yesterday). We don’t expect the eco/event calendar to interfere with ruling market dynamics. Core bonds steadily lose ground, but moves aren’t that violent to interfere with a mild risk-on stock market climate. The dollar corrects lower after a stellar month, but EUR can’t really take over command. We assume the single currency waits the ECB’s go-ahead. Next week’s policy meeting is a wildcard.
News headlines
UK PM Johnson and New Zealand PM Ardern reached an agreement in principle on a new free trade deal. Tariffs on 97% of the products will be eliminated for both countries the day the deal comes into force. The text will be finalized over the coming months. The UK already reached a similar in principle agreement with Australia in June. UK Ministers see the deal as potentially supporting their aim toward joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – an 11-country bloc including Australia, Singapore and Mexico.
The Fed’s Beige Book indicated that employers assess US economic growth as ‘modest to moderate’. The near term outlook remains positive, but some mention increasing uncertainty because of supply chain disruptions, labor shortages and the spreading Delta-variant. Most districts reported significantly elevated prices and many firms raised selling prices indicating a greater ability to pass along cost increases amid strong demand. Employment increased, though labor growth was hampered by a low supply of workers, despite wage increases to attract new hires and keep existing employees. Firms also reported higher turnover as workers left for other jobs or retired.
