Markets
The post-payrolls/CPI bond market rally continued yesterday and reinforced existing trends in most other markets. The minutes of the June ECB meeting showed a strong commitment to continue the campaign to eradicate inflation. A 25 bps July rate hike is a certainty with probably more follow-up action to come as the MPC stays attentive to persistent high core inflation. Bunds added substantial gains early in the session, but then shifted to consolidation modus. In the end, German yields lost between 9.3 bps (10-y) and 6.2 bps (30-y). After the recent setback (in yields) maybe it’s time for some technical levels to come in play. For the 2-y German yield, the 3.03% end July low is a first reference. Further out on the curve, there’s little reason for the 10-y Bund yield to sustainably trade below the 2.5% barrier (close yesterday at 2.485%). US data were mixed with final demand PPI dropping more than expected to 0.1% Y/Y. US jobless claims declined to 237k, indicating that the early June uptick shouldn’t be considered as a pointer of a genuine easing of labour market conditions. The bond rally briefly slowed after the claims release, but US yields still lost between 12.6 bps (5-y) and 4.6 bps (30-y ) in a daily perspective. The 2-y yield (4.64%) now fully retraced the acceleration that started end June. The 10-y yield (3.77%) is somewhat above the 3.7% ST support area that put a floor end June. Overnight, Fed Waller indicated that he still expects the Fed to raise rates twice this year even as a September rate hike will depend on the two inflation reports that will be available by then. Fed Daly took a more neutral stance, but also said that it’s too early to declare victory on inflation. The bond rally further propelled risk assets. The EuroStoxx 50 added 0.72%. Intraday, it tested again the 4400 level. US indices gained between 0.14% (Dow) and 1.58% (Nasdaq). Even cyclical commodities like copper and oil extended recent gains. The dollar was the main victim of investor anticipation on the (potential) end of the Fed hiking cycle. DXY (close 99.77) further dropped below the key 100.86 key neckline unravelling the technical picture. EUR/USD (close 1.1226) vigorously extended its leap beyond the previous YTD top of 1.1095. The yen declined further against the dollar (close USD/JPY 138.5), but lost against the euro (close 154,99). Sterling gained mildly but at 0.8546, EUR/GBP stayed away from the 0.85 big figure/support area.
Asian equities this morning show limited gains as the risk rally slows. US yields don’t decline any further. The dollar still struggles to avoid additional losses (DXY 99.73, EUR/USD 1.122). The eco calendar is thin today. In the US, Consumer Confidence of the University of Michigan deserves some attention, both for the headline figure (expected at 65.5 from 64.4) as well as for the inflation expectations series. On bond markets we see room for some end of week consolidation/profit talking. The technical picture suggests an ongoing uphill battle for the dollar.
News and views
Hungary is thinking of issuing short-term euro- and USD-denominated debt, with a maturity less than one year, the AKK debt agency announced on its website. Short-dated dollar bond buybacks at the beginning of the year has reduced the annual amount of foreign currency bond maturities to a record low level in the following years. It has set up a Euro Commercial Paper plan under which it is able to issue as much as €1bn. The new programme allows for cost-efficient liquidity management and diversifies the investor base, AKK said.
Exit RBA governor Philip Lowe, enter Michele Bullock. Australia’s treasurer Palmers announced Bullock as the new head of the Reserve Bank of Australia. She’s the first woman to take over the helm on September 18 this year. Bullock is seen as the continuity candidate. Although the current deputy governor has a slightly more dovish signature compared to Lowe, there are no major implications expected for monetary policy going forward. Under Lowe, the RBA tightened policy rates by 400 bps to 4.1% since May 2022 to fight inflation. This aggressive campaign drew criticism as it followed a sharp U-turn on previous guidance that rates wouldn’t rise before 2024. The Aussie dollar shrugged at the decision to replace Lowe by Bullock. AUD/USD trades unchanged around 0.688. In other central bank position switch news, the Fed’s most outspoken hawk James Bullard (St. Louis) is resigning to pursue an academic career. Bullard was the first to call for an aggressive tightening campaign, recognizing the inflation threat. His views often turned reality, making him an influential voice. This year, however, he doesn’t vote on policy.
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