Markets
Several events coloured trading yesterday. The Polish central bank sent shockwaves through local and neighbouring markets after cutting the policy rate by the 75 bps that no one foresaw. The zloty and rates nosedived. Second: ECB’s Knot and Kazimir seized the final speaking opportunity ahead of the blackout period. The former said markets are underestimating of something happening (i.e. a rate hike) at the September meeting. Kazimir sees the need for one more move and added a September hike is preferable to a later increase. And finally, the US services ISM. The indicator unexpectedly rebounded from 52.7 to 54.5 on a pickup in new orders to an elevated 57.5, a sharp 4 point rise in employment to 54.7 and a high level of business activity (57.3). The prices paid subseries extended a recent revival to 58.9. The outcome supports once more both a final Fed rate increase as well as keeping policy restrictive for a significant period of time even as the Fed’s Beige Book suggested a slowdown in activity and hiring growth. US yields gained between 1.9-6.7 bps with the front underperforming. The 2-y retook the 5% barrier again. The ECB comments helped German yields leave the intraday lows. A second upleg followed in lockstep with the US. Net daily changes varied from 1.6 bps (30-y) to 7.7 bps (2-y). The dollar recouped losses after the ISM. EUR/USD closed at 1.0727, marginally up from 1.072. USD/JPY stabilized near the recent highs around 147.7. That DXY eked out a small gain still (north of the 104.7 resistance) had to do with the dollar appreciating against sterling. GBP/USD fell towards 1.25. Sterling was weak too (see below). EUR/GBP rebounded from 0.8533 to 0.8577.
Stocks yesterday were weighed down by the (real) yield increase (WS down 1% in tech) and sentiment remained grim in Asian dealings. China underperforms, losing about 1%. It’s currency is about to hit a new multi-year low (USD/CNY 7.324). The dollar in general trades a tad stronger. EUR/USD turns south to 1.072. The yen’s safe haven status prevents it from losing further territory. Core bonds trade with a small weakening bias. Today’s economic calendar has dried up. It only contains the US weekly jobless claims. The several ECB speeches due can’t touch on monetary policy. Those scheduled for the Fed may still do as the silence period only kicks in this Saturday. We expect core bond yields to at least hold on to their recent gains in what is probably a technically inspired session. The dollar retains the upper hand against the euro. EUR/USD is developing within a downward trend channel. 1.0635 is the next high profile support zone but without a specific trigger it should survive the day.
News & Views
The Bank of Canada (BoC) yesterday as expected left is policy rate unchanged at 5.0% and continues its quantitative tightening. The BoC saw the economy entering a period of weaker growth needed to slow prices pressures. Growth in the second quarter even turned negative (0.2% QoQa), reflecting a marked weakening in consumption growth and a decline in housing activity, as well as the impact of wildfires. The tightness in the labour market has continued to ease gradually, but wage growth remained around 4% to 5%. Still, the BoC assesses inflation as broad-based. CPI inflation moved back up to 3.3% in July and recent rise in oil prices might keep inflation higher in the short-term. Core inflation is running near 3.5% with little downward momentum recently. The decline in excess demand and assuming still lagging effects of monetary policy filtering through in the economy, the BoC left the rate unchanged. However, the Governing Council remains concerned about the persistence of underlying inflation and is prepared to increase the policy interest rate further if needed. The 2-y Canada government bond yield rose about 5 bps after the policy announcement, but that was mainly due to global factors. Markets still see slightly less than 50% for an additional hike later this year. The loonie closed the session little changed against the dollar (USD/CAD 1.3636).
In a hearing before the Treasury Committee of the UK Parliament, Bank of England Governor Bailey and two other colleagues kept a mild tone on further policy tightening. According to the BoE governor, the bank is near the top of the hiking cycle. Inflation recently has dropped and Bailey indicated that recent indictors are signaling that the fall inflation will continue. He also argued that a substantial amount of transmission still has to come as this process apparently has longer lags than initially expected. The market still sees two additional 25 bps rate hikes going into next year. However, a new 25 bps step at the September 21 meeting is no longer fully discounted. Sterling weakened during the hearing with EUR/GBP jumping back higher to close at 0.8577, up from the 0.8530.
