Markets
Markets took a constructive start for the new week/month yesterday. The US majors (Dow, S&P, Nasdaq) closed at record levels. The EuroStoxx 50 set a new cycle top. Positive earnings are part of the story. Markets remain fairly confident that central bankers will be able to strike a good balance between addressing the inflation acceleration without killing growth, with the Fed, the BoE and several smaller CB’s holding key policy meetings later this week. The US manufacturing ISM also provided some comfort. The headline index declined only marginally from 61.1 to 60.8. Supply disruptions still complicate production. Prices paid remained at a very elevated level (85.7). Orders eased, but production growth remained at a high level (59.3) while job creation improved (52.0 from 50.2) despite a persistent mismatch between supply and demand for labour. At the end of the day, US yields changed less than one basis point for the 2y/10y sector. The 30y yield rose 2.5 bps. This apparent calm masked a sharp rise in real yields (10y +7.75 bps) and a more or less similar decline in inflation expectations. The German yield curve steepened (-2.4 bps 2y vs +3.2 bps for the 30y). Swings in real yields/inflation expectations were more modest than in the US. Still, the German 10y real yield stays well north of -2% (-1.97% vs a low near -2.21% last week). The dollar yesterday showed a rather ‘inconsistent’ pattern. The rise in US real yields didn’t help the US currency. Also the impact from a constructive risk sentiment was not that straight forward. EUR/USD regained modest ground after Friday’s battering (close 1.1606). USD/JPY couldn’t hold on to intraday gains and closed little changed at 114. Sterling lost further ground, especially against the euro as markets ponder the pace and timing of BoE interest rate hikes (close 0.849).
Asian markets fail to join the constructive risk sentiment in the US and Europe, with China underperforming. The RBA takes a first step to policy normalization (cf infra). The eco calendar is almost empty except from some central bank speak. Investors mainly will keep an eye at the corporate results and look forward to the central bank meetings later this week. US yields recently took a breather, both at the front end and at the longer maturities as investors try to assess the link (time-gap) between tapering and a first rate hike. 1.51%/1.54% is first important support for the US 10y yield. The German 10y yield yesterday again tested the post-corona top near -0.07%. This is also the case for the 10y EMU swap (0.30% area). Further gains would be highly significant from a technical point of view. EUR/USD is still going nowhere in a tight range between 1.1530/1.1690. A break before tomorrow’s FOMC meeting looks unlikely. Sterling traders apparently grow less confident on an aggressive start of the BoE normalization cycle . Sterling momentum is easing. with EUR/GBP trying to regain the 0.85 handle.
News headlines
The Reserve Bank of Australia kept the main policy rate at 0.1%, sticks to buying government bonds at a pace of A$4 bn per week but ditched its 0.1% target on the three year yield. It does so because the economy has improved and the RBA sees inflation reaching target earlier than expected. Growth has been revised upwards to 3% this year, 5.5 % the next and 2.5% in 2023 and 2024. Underlying inflation is expected at 2.25% in 2021 and 2.5% in 2023. The RBA remains committed not to raise rates before inflation is sustainably at target. It did scrap, however, a reference saying it doesn’t expect that to happen “before 2024”, saying instead it is “likely to take some time”. Australian yields fell across the curve in a bull steepening move. The Aussie dollar loses AUD/USD 0.75 in a contained decline.
France backed down from a threat to impose additional custom controls on British goods entering and to block UK fishing boats from landing their catches in France. The dispute is centred around French accusations the UK is denying French fishermen access to British waters. Macron said the UK promised to come up with new proposals today, adding that it won’t bring in sanctions while they are negotiating. The fishing rights dossier is symbolic in nature rather than economically crucial but it highlights the difficult relationship between the EU and UK post-Brexit. The UK is also on a collision course with the EU over the Northern Ireland protocol which it seeks to overhaul.
