Markets
Both the US 10-yr and 30-yr yield tested the autumn 2022 cycle high yesterday, respectively at 4.34% and 4.42% and matching highest levels in over a decade. We pointed out before that higher (US) real yields are driving the move. It’s a combination of reduced recession risks, a higher credit risk premium and a return of the term premium as markets embrace the higher for even longer scenario in combination with a likely increase of the Fed (and other central banks for that matter) neutral rate. The UK 10-yr yield broke above the cycle high (4.71%) with the German 10-yr yield on the brink of testing it (2.77%). The intensity of this month’s sell-off and the nearby resistance levels could prevent a break short term, but we stick to our view of higher rates medium to long term as we return to the “old normal” (pre-GFC). The Fed’s symposium at Jackson Hole is the next high profile event with Fed Chair Powell announced to speak on the economic outlook on Friday August 25 at 4:05 pm CET.
Higher real rates weighed on risk sentiment over the past sessions with main European and US indices losing over 1% again yesterday. The EuroStoxx 50 (4227) is near a test of key support around 4200 (May and July lows). The S&P 500 is showing a toppish pattern with the June low at 4328 being first minor support. The dollar gained some ground but the greenback failed to really gain momentum. The trade weighted dollar (DXY) tested the July high at 103.57 but a break didn’t occur. EUR/USD 1.0834 support is close, but not tested yet. The combination of higher (real) rates and a difficult risk environment stays USD-supportive especially with a September Fed rate hike -our preferred scenario – only partly discounted. Today’s eco calendar is extremely thin with UK retail sales being the only highlight.
News Headlines
The Spanish parliament voted Francina Armengol as next Speaker of Congress, about a month after inconclusive general elections. She gathered 178 votes (2 above the required absolute majority threshold) coming from a leftist bloc around acting Socialist PM Sanchez. Socialists came in second last month, but unlike the election-winning center-right Partido Popular, they do have a tiny path to power. Therefore, they need the backing of six other parties, including Together for Catalonia. The party led by former Catalan president Puigdemont who still lives in exile in Belgium said though that the Speaker vote was in no way linked to the choice of a new PM. To secure backing for the Speaker vote, Sanchez agreed a pact to promote the use of regional languages and to investigate alleged spying on Catalan leaders. He will have to pay a much higher price (referendum, amnesty,…) if he wants Together for Catalonia to be kingmaker in a (September?) government formation process. Without a deal, Spain will be forced to hold fresh election by the end of the year or early in 2024. That is still the most likely outcome.
National Japanese inflation figures for the month of July showed headline inflation rising by 0.5% M/M with the Y/Y-figure stabilizing at 3.3%. The BoJ’s preferred core inflation gauge (excluding fresh food) rose by 0.4% M/M and by 3.1% Y/Y (from 3.3% Y/Y in June). However, there’s no reason to declare victory yet with the measure excluding fresh food and energy accelerating from 4.2% Y/Y to 4.3% Y/Y on a 0.5% M/M gain. Details showed that service inflation is quickening and offsetting lower utility prices and negative base-effects. Looking forward, services inflation is only expected to speed up with Japan enjoying first Covid-free August summer holidays for the first time in 4 years. It suggests that the BoJ will need to stay alert to upside inflation risks as flagged at their July policy meeting. At that meeting, they raised the tolerance band around the 0% yield target for the 10y yield from 50 bps to 100 bps. Japanese bond yields joined this week’s global move higher with a weak 20-y bond auction causing significant underperformance at the very long end of the curve. The Japanese yen remains in dire straits as higher core bond yields hurt with the BoJ still unwilling to really normalize its monetary policy. Officials have been sending out verbal FX intervention warnings with USD/JPY 150 a possible line in the sand (vs 145.50 currently).
 tested the July high at 103.57 but a break didn’t occur. EUR/USD 1.0834 support is close, but not tested yet. The combination of higher (real) rates and a difficult risk environment stays USD-supportive especially with a September Fed rate hike -our preferred scenario – only partly discounted. Today’s eco calendar is extremely thin with UK retail sales being the only highlight.){kind=link}