Markets
US inflation took center stage last week. A stellar CPI print of 6.2% y/y on Wednesday caused an incredible bear flattening with yields up more than 10 bps at the short and medium segment of the curve. All of those gains were held on to or even extended (in longer tenors) going into the weekend even as the US consumer sentiment (U. of Michigan) on Friday unexpectedly dropped to a 10-year low. The reason helps explain why. US consumers are increasingly worried about the inflationary impact on their finances and say there are no policies in place to reduce the damage. Inflation thus starts getting political (also see headline below) and may reinforce market’s conviction the Fed will act sooner rather than later. In contrast, the knee-jerk boost in German ST yields post-US CPI was more than erased by the end of the week. US stocks on Friday recouped some of the loses induced by rising rate hike bets earlier in the week. Gains varied from 0.5-1%. The US dollar benefited with EUR/USD breaking below key support at 1.1493/95 to finish the week at 1.1445. USD/JPY’s comeback to above 114 was unconvincing. Sterling eyed potentially crucial talks between the UK and EU on the Northern Irish protocol on Friday. They only agreed, however, to intensify talks this week. EUR/GBP fell from 0.8563 to 0.8531.
Asian-Pacific markets trade mixed this morning. South Korea outperforms. Japan gains about 0.5% as disappointing GDP growth (-0.8% q/q vs -0.2% expected) increases the odds of a big Japanese fiscal stimulus package. Chinese equities inch lower despite solid readings in retail sales (4.9% y/y) and industrial production (3.5% y/y). New home prices fell for a second month straight (-0.25% m/m) and property investment eases from 8.8% to 7.2%, adding evidence to a cooling real estate sector. USD/CNY holds near recent low around 6.38. The dollar trades slightly in the defensive after a major bull run last week. Today’s US NY Manufacturing index will probably be of secondary importance. ECB’s Lagarde speaks before the European Parliament where she will be grilled on the central bank’s policy in an environment of above-target inflation. We don’t expect her to change tack though. That may have to wait until the December policy meeting. We therefore remain cautious on yields and on EUR/USD in the short run, especially after last week’s technical break. Next support lies at 1.1422 (June 2020 interim high). We also keep a close eye at Bank of England’s Bailey and Pill (together with Mann and Saunders) having a similar testimony before UK Parliament. Will they shed more light on the decision to backtrack on a telegraphed November hike? With more UK/EU talks scheduled for this week, we assume the downside in EUR/GBP in general to be better protected.
News headlines
Bulgaria went to the polls for a third time this year. Corruption protests against the center right Gerb party and its prime minister Borisov, triggered first elections in April. Opposition parties and new populist parties failed to agree a coalition. July parliamentary polls produced a similar outcome. This time around, there might be a way out. The very recently founded “We Continue To Change” (PP) unexpectedly won the election with slightly over 25% of the votes. Together with populist party ITN (>15%), Socialists (9%) and Democratic Bulgaria (6%) they would be able to set-up a majority gover
A Washington Post-ABC News poll shows that if US elections were held today, 46% of adults overall would support the Republican candidate for Congress and 43% the Democratic one. The poll confirms recent Democratic losses in the Virginia elections and the unexpectedly close call in the New Jersey gubernatorial race. Biden’s approval rating declines to new lows for the way he handles the Covid-pandemic (47%), his overall presidency (41%) and the economy (39%). Recently passing the infrastructure bill didn’t provide the hoped-for boost. About half of Americans overall and political independents blame Biden for fast-rising inflation. US Treasury Secretary Yellen on CBS said that controlling Covid-19 is key to taming inflation. Politically backfiring inflation worries could add pressure on the Fed to act sooner rather than later.
