Markets
Last week’s heavy correction/short covering on core bond markets continued into the closing bell. The Bank of England’s deception put off most hasty (G4) policy normalization bets while Fed Chair Powell (and BoE governor Bailey for that matter) tried to guide the focus from stubbornly high inflation to room for progress on the labour market. Decent to strong October payrolls failed to pick up that role of lightening rod. A spike lower in US Treasuries soon met with fresh core bond buying. US Treasuries in a daily perspective did underperform vs German Bunds and UK Gilts. The US yield curve bull flattened with yields dropping 2.3 bps (2-yr) to 7.6 bps (30-yr). The US 10-yr yield fell below the neckline (1.51%) of an head-and-shoulders formation with targets at 1.41%, 1.39% and 1.32%. The German yield curve moved in similar fashion with yields declining by 1.9 bps (2-yr) to 9.2 bps (30-yr). The German 10-yr yield already on Thursday dropped through the neckline of a triple top formation with final target at -0.32%. UK Gilt yields lost 7.9 bps (2-yr) to 12.7 bps (30-yr). The sharp repositioning at the front end is striking as investors discounted a BoE rate hike. We assume that the pace of the core bond gains will at least slow this week. Attention in first instance shifts to the US Treasury’s mid-month refinancing operation. Tonight’s 3-yr Note sale will be followed by 10-yr Note and 30-yr Bond sales tomorrow and on Wednesday. The outcome will be telling for investor appetite at current market levels and given current inflation dynamics. Additionally, US Congress on Friday finally approved the Biden’s infrastructure bill (see below) which includes $550bn in new funding. It suggests that last week’s falling projected sales in the quarterly refunding announcement will be a one-off and potentially even reversed. This week’s second highlight is Wednesday’s October US CPI release. Consensus expects an increase from 5.4% Y/Y to 5.9% Y/Y, which would be the highest level since 1990. The market reaction will test Powell’s attempt to focus on the labour market as “temporary” inflation pressures should subside in spring next year. Speeches by a whole bunch of ECB and Fed governors serve as a wildcard in the holiday-thinned/reduced trading week. US markets are partially closed on Thursday in observance of Veteran’s Day.
USD attempted to eke out gains following the payrolls report, but the trade weighted greenback (DXY) failed to take out resistance near 94.47/74, prompting some return action lower. EUR/USD set a minor new YTD low at 1.1514 with key support (1.1495/93) still luring. USD/JPY first support at 113.26 held despite JPY-positive yield moves. Sterling is still in the ropes following the BoE-debacle with focus now shifting to the EU-UK row on the Northern Ireland protocol. Irish ministers over the weekend stepped up trade rhetoric after the UK snubbed their proposals to break the deadlock. Both parties meet again on Friday. EUR/GBP could settle north of 0.86 in the run-up.
News headlines
The US House of Representatives approved the $1tn infrastructure bill. The bill was already approved in the Senate in August. The approval in the House got the support of 215 Democrats and 13 Republicans. The bill will now be sent for formal signing to President Biden to become law. The approval was possible after progressive democrats agreed to decouple the approval of the infrastructure bill from the vote on the larger social spending plan ($1.75tn Build Back Better social safety net). Moderate Democrats in the House issued a statement to their progressive colleagues that they would vote in favour of the ‘Build Back Better’ plan no later than November 15.
China posted a record monthly trade surplus of $84.54 bn in October. The record surplus was the result of higher than expected exports (+27.1% Y/Y) at $300.2bn. Imports rose a more modest 20.6 %. The strong external performance of the Chinese economy might to some extent counter a slowdown in domestic economic activity due to, amongst others, the real estate sector, electricity shortages and a less buoyant consumer demand linked to new corona outbreaks. The strong export performance also supported a further rise in China’s FX reserves ($3.22tn in October). The yuan this morning trades basically stable against the US dollar holding near USD/CNY 6.3974.
