Markets
After a benign market reaction on Fed decision day, markets yesterday showed quite some volatile swings. This was both due to ECB communication but also result of the market interpreting strong US data in the light the Fed’s data dependency. Data dependency also became the ECB’s new mantra. The bank as expected raised its policy rates by 25 bps, bringing the depo rate to 3.75%. The ECB still sees inflation as remaining too high for too long. However, improvement is visible. The bank repeated it will set interest rates at a sufficiently restrictive level for as long as necessary. However, whether this will result in additional rate hikes (in September or later) will be fully depended on the incoming data. The shift to an open minded approach initially triggered a sharp decline in EMU yields, but most of this move was reversed later, partially due to global/US market moves. German yields closed between 3.8 bps lower for the 2-y yield while the 30-y added 1.5 bps. In the US, the post-Fed calm was abruptly overthrown by a set of strong US data (Q2 GDP growth at 2.4% Q/Qa, better than expected jobless claims and solid durable goods orders). US yields started a protracted uptrend, which was reinforced by a mediocre 7-y Treasury auction and a Nikkei report that the BoJ could tweak its yield curve control. US yields added between 7.7 bps (2-y) and 12.1 bps (10-y). The latter briefly surpassed the 4.0% barrier. Equities initially gained on the combination of a perceived soft data dependency from the Fed and the ECB combined with resilient US data. However, sentiment changed after the Nikkei report on a potential change in the BoJ’s YCC policy. The Eurostoxx 50 still closed at a new cycle top (+2.33%) but US indices more than reversed initial gains (S&P 500 -0.64%). Interest rate divergence triggered a sharp USD rally especially against the likes of the euro. EUR/USD tumbled from an intraday peak near 1.1150 to close at 1.0979. DXY jumped from the 100.60 to near 101.8. USD/JPY initially surpassed the 141 big figure post the US data but the yen jumped sharply on the aforementioned report (USD/JPY close 139.48).
Dubbed governor “Ueda’s first surprise”, the Bank of Japan this morning unexpectedly made an admittedly little tweak to its Yield Curve Control programme. The central bank loosens its grip on bond yields a bit by allowing the 10-y yield to move more flexibly around the unchanged 0% +/- 50 bps cap. In the recent past, the central bank intervened as soon as the 10y bond yield moved above the 0.50% topside. That happened on multiple occasions amid a global core bond yield surge and rising domestic inflation. Tokyo inflation in July this morning for example came in at 3.2% with core measures above the 2% target as well. Prices ex. food rose 3%. Leaving out energy as well, inflation even accelerated to 4%. The BOJ raised the rate to 1% for its fixed-rate bond buying operations, suggesting it is willing to accept 10-year rates to move to that level. In practice this comes down to the yield cap being raised from 50 bps to 100 bps. The reason the central bank did not just do that is that it probably didn’t want to send a too hawkish signal. The new forecasts underpin this. Inflation for this FY was dramatically revised up from 1.8% to 2.5%. For next year, however, a tiny 0.1 ppt downgrade to 1.9% means inflation in theory will not reach the 2% target. The FY+2 forecast was left unchanged at 1.6%. Growth for this year was marginally revised lower to 1.3% with the projections for FY+1 and +2 left stable at 1.2% and 1%. News of the possible YCC tweak was reported yesterday evening in US dealings already, triggering a yen surge already then. The Japanese currency continues to appreciate this morning, with USD/JPY in volatile trading currently hovering near 139. Additional euro weakness pushed EUR/JPY towards the lowest level since mid-June at 151.50 area. Japanese 10-y yields sear almost 10 bps.
The ‘tweak’ In the BOJ YCC of course is the dominant feature for trading in Asia this morning. However, the eco calendar in the US and Europe later today also has plenty of market moving potential. In the US, June spending and income data are expected to show decent growth (0.5% and 0.4%), but the focus will be on the Q2 employment cost index (expected at 1.1%). Fed chair Powell at the press conference on Wednesday mentioned this series as an important input in the Fed’s data dependent analysis. EMU member states including France, Spain, Belgium and Germany will report July CPI figures. German Y/Y HICP inflation is expected to slow to 6.6% from 6.8%, but the monthly dynamic is still seen at a strong 0.6% M/M. The move in the US market yesterday illustrated that after a soft market assessment of CB’s data dependent approach, markets are sensitive to upside surprises in data. On FX markets, a EUR/USD close below 1.1021/1.10 would deteriorate the ST technical picture.
