Markets
High profile technical levels eventually prevailed last Friday in a session absent of eco data, central bank speak or any other high-profile event. Core bonds ended off worst levels YTD after a surge higher in (US) real yields dominated most of August trading. It resulted in tests of cycle tops at the very long end (10y-30y) of US, but also German and UK yields. At 1.94%, the US 10-yr real yield had its highest weekly close since March 2009. A return of term premia (higher for even longer), credit risk (Fitch downgrade & public finances) and improved growth prospects (soft landing vs recession) all contributed. The lack of conviction of Friday’s core bond rebound suggests that the test of (yield) resistance levels remains ongoing. Higher real rates hurt risk sentiment. European stock markets lost around 0.5% again on Friday, but important support survived just for now. The picture remains fragile though, with EuroStoxx50 ending only just above 4200 and Asian risk sentiment this morning sluggish after Chinese data (see below). Main US stock indices ended around flat Friday, but the likes of the S&P 500 are clearly showing a topping out pattern, admittedly still withing the long term rising trend channel. First support kicks in at 4329. The dollar failed to really bank on the rater support with the trade weighted greenback testing, but for now not breaking, first resistance at 103.57. A real test of EUR/USD 1.0834 support didn’t occur yet. USD/JPY rallied from 138 mid-July to 146 currently. The Japanese ministry of Finance started its first FX interventions in almost 15 years around those levels last September. They later stepped it up around 150. The global context and unwillingness by the BoJ to really start normalizing monetary policy mean that JPY remains vulnerable.
Today’s eco calendar is empty apart from a Belgian OLO auction. The debt agency offers OLO 89 (0.1% Jun2030) and OLO 97 (3% Jun2033) for a combined €2.4-2.8bn. YTD, the debt agency already realized over 76% (€34.3bn) of its total OLO financing plan (€45bn). The bulk of this amount (€16bn) came from three syndicated deals. August global PMI’s (Wednesday) serve as distraction later this week going into Friday’s big event when Fed Chair Powell’s discusses the economic outlook at the US central bank’s high profile Jackson Hole symposium organized by the Kansas City Fed. Apart from guidance for the September meeting (no rate hike discounted), we look for clues on the neutral rate, the economic resilience and the disinflationary process. FOMC Minutes showed that for the majority of Fed members, the bar to hike rates another time is low given upside inflation risks.
News and Views
Chinese Banks announced to reduce the 1-year Loan Prime rate to 3.45% from 3.55%. The 5-year Loan Prime rate was kept unchanged at 4.20%. In both cases, the market expected a 15 bps reduction after the PBOC last week reduced the 1-year Medium-Term Lending Facility rate by a similar amount from 2.65% to 2.50%. The smaller than expected reduction in the bank rates leave markets in doubt on the degree of monetary support that Chinese authorities are prepared/able to put in place to revive economic activity in general and the ailing property sector in particular with deflationary tendencies also dampening activity. Uncertainty on the policy mix keeps the yuan in the defensive this morning with USD/CNY again jumping north 7.30 (7.3065) even as the PBOC set its daily fixing stronger than expected by market participants.
In a forecast published on Friday, the Czech Ministry of Finance downwardly revised growth for this and next year respectively to -0.2% (from 0.1%) and 2.3% (from 3.0%). Average inflation for this year was seen unchanged at 10.9%. The average predicted price rise for 2024 was slightly upwardly revised from 2.4% to 2.8%. At the same time, the Finance ministry forecasts a substantial improvement in the current account deficit. For this year, the Ministry sees a deficit of 1.7% and for next year of 0.6%. This compares to deficit forecasts of 3.5% and 1.9% respectively released in its April projections.
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