Markets:
Core bonds started slipping going into the US session following a rather dull European encounter. There is no clear driver, though earnings by Wall Mart and by Home Depot offered a sigh of relief to investors. Earnings topped (lowered) estimates with retailers showing more resilience than feared. The results at least temporary put aside very grim growth forecasts. Tomorrow’s US retail sales could confirm this narrative. Brent crude also recovered somewhat after yesterday’s beating (Brent back above $95/b). US yields add 5.2 bps to 6.8 bps with the belly of the curve underperforming the wings. The German yield curve bear steepens with yields adding 6 bps (2-yr) to 9.3 bps (30-yr). The German 10-yr yield tests 1% resistance (August high and topside of corrective downward trend channel) Today’s eco calendar contained US housing data (especially housing starts) which continue to point to a pullback in demand (growth fears and high mortgage rates) and a pickup in inventory and German ZEW investor sentiment which more or less stabilized near July levels. In FX space, EUR/USD temporary dipped below 1.0150 but the pair broadly holds near yesterday’s lows. Sterling marginally outperformed (EUR/GBP 0.8422), but UK labour market didn’t really have some to do with it. UK employment rose by 160k in the 3 months ending June, below 268k consensus with the unemployment rate stabilizing at 3.8% over that same period. Average weekly earnings accelerated to 4.7% Y/Y ex. Bonuses. Monthly (July) data showed a 73k net job gains with jobless claims falling by 10.6k. UK job vacancies fell from the first time since August 2020. The UK eco calendar remains interesting with inflation numbers (tomorrow) and retail sales (Friday). News Headlines:
Canadian CPI rose by 7.6% Y/Y in July, down from 8.1% Y/Y in August and in line with consensus. A deceleration in gas prices was the main culprit. Excluding gasoline, prices rose by 6.6% Y/Y, up from 6.5% Y/Y in June. The monthly price dynamic slowed to 0.1% in July with a fall in gasoline prices (-9.2% M/M) being offset by price increases for other non-durable goods and in-person services. Inflation continues to exceed Y/Y wage growth (5.2% in July) though the gap in purchasing power decreased compared to June. The persistent broad-bases inflation pressure suggests that the Bank of Canada will continue its aggressive tightening cycle early September. Governor Macklem and co started frontloading rate hikes in July with a surprise 100 bps move. Canadian money markets are at odds whether the next move will be a 50 bps or 75 bps one. The loonie briefly ticked higher on the inflation release, but couldn’t recover yesterday’s losses. Dollar strength and the crashing oil price yesterday propelled USD/CAD from 1.278 towards 1.29, where it is still trading at the moment. The Canadian swap rate curve becomes more inverse today, with yields adding 8.5 bps (2-yr) to 3.9 bps (30-yr).
The new trading week saw back-to-back dovish comments by Czech National Bank board member Frait (yesterday) and vice governor Zamrazilova (today). According to Frait, the current level of Czech interest rates is creating restrictive monetary conditions. He points to significantly slowing growth in new loans and first signs of cooling down in the housing market. More tightening by global central banks will weaken global demand further with is something he wants to take into account when setting Czech monetary policy. Zamrazilova said that a large part of domestic demand-driven, local, factors won’t be the main inflation driver anymore. She points out that high food and energy prices are curbing household spending on non-essential goods. A wage-price spiral remains a risk though. The Czech koruna trades in the defensive for a second session straight with fighting in Crimea adding to weakness in CEE currencies in general. EUR/CZK rose from 24.44 to 24.54. Back in June, the CNB stepped in the FX market to prevent CZK from weakening beyond EUR/CZK 24.75. The forint is the local underperformer, with EUR/HUF rising from 392 to 405 this week. The zloty outperforms regional peers with EUR/PLN only a tad weaker near 4.70 (from 4.65).
