Markets
Core bonds rose yesterday with USTs outperforming the Bund, shrugging off a tailed US 20y bond sale. The US yield curve bull flattened with changes ranging from -1.8 bps (2y) to -5.3 bps (30y). US housing starts disappointed in contrast to building permits, suggesting demand is solid but material and labour shortages weigh on construction. In addition, Brent oil prices fell towards the $80/b neckline after word got out that US President Biden wants the Federal Trade Commission to use all tools to examine fuel price wrongdoing. Markets took it as another hint the US will eventually release some of the strategic oil reserves to ease prices. The oil price decline was a key driver for faltering inflation expectations (-3 to -4 bps) in the US. German yields closed flat on face value but real yields (10y) hit a new all-time low at -2.25% in underlying dynamics. This was the main reason for EUR/USD’s lackluster performance even though the greenback corrected in general. Support at 1.129 survived but that’s basically all we can say. The trade-weighted DXY’s move north of 96 quickly ran into resistance (close 95.83). The Japanese yen saw an opportunity on falling (US) bond yields. USD/JPY erased all of the retail sales driven surge from around 114 to 115 and back. Stronger-than-expected CPI boosted sterling with odds for a BoE rate hike next month increasing. EUR/GBP finished at a new 2021 low south of 0.84. Cable gained to 1.349.
Two stories feature Asian dealings this morning. Japanese stocks erase previous losses after newspaper Nikkei reported the new Japanese fiscal stimulus package would amount to 55.7tn yen compared to the 40tn previously estimated. Chances of government support being ramped up rose after Q3 GDP figures last week disappointed heavily. The yen loses out vs. USD and EUR. A survey by the RBNZ showing inflation expectations rose to a decadehigh spurred rate hike bets and lifts the kiwi dollar (cfr. infra). Core bonds and other dollar pairs trade flat. Brent oil trades sub $80/b (see also below).
Technical considerations will guide trading today in absence of meaningful economic data. We’ve seen the dollar hitting resistance levels vs. the euro (1.129), the yen (115) and in the trade-weighted (96, upper bound in upward trend channel), suggesting strong USD momentum may ease a bit from here on out. Dragonfly doji’s in EUR/USD and DXY could herald a short-term reversal. Core bonds will largely be driven by overall sentiment, which turned a bit for the better going into the European open. Sterling awaits the final economic update with UK retail sales due tomorrow. It could force a sustained break sub 0.84 which then paves the way towards the 2020 lows of 0.8282.
News headlines
The Reserve Bank of New Zealand published its quarterly survey of business expectations. Inflation expectations for one, two and five years ahead all increased from Q3. One year ahead inflation expectations had a mean of 3.70% (from 3.02%), which is the highest since September 2010. The mean for two year ahead expectations rose to 2.96% (from 2.27%). This metric has only been higher in two occasions since March 1991 and risks moving out of the RBNZ’s 1-3% inflation target band . Five year ahead inflation expectations increased from 2.03% to 2.17%, the highest reported figure since it was added to the survey in September 2017. The RBNZ is expected to next week proceed its tightening cycle with a follow-up 25 bps rate hike to 0.75%. NZD/USD rebounds this morning with NZD strength accompanied by some USD correction. The pair so far prevented a return south of the 0.70 big figure.
Reuters reports that China is working on the release of crude oil reserves although the country’s National Food and Strategic Reserves Administration kept silence on the US’ request to disclose any details. The Biden administration is lobbying countries like China, India and Japan to consider releasing stockpiles in a coordinated effort to lower energy prices. The unusual request comes after OPEC+ on several occasions declined to meet Biden’s request to speed up production increases. Brent crude since yesterday fell from $82/barrel to just below $80/b. The latter serves as a technical neckline of a short term double top formation with targets near $74/b.
