Markets:
The German Bund opened lower this morning, catching up with the US Note future’s losses after Chinese President Xi Jinping reached out to the US in a market-friendly speech. Other Chinese comments later dented early optimism somewhat, suggesting difficult negotiations ahead. Core bonds hovered sideways during the first half of European trading. The Bund lost ground after noon when ECB Nowotny became the first ECB official to call for a start to policy normalization, mainly because he sees inflationary pressures building and expects inflation to hit the 2% target in the medium term. He specifically called for a 20 bps deposit rate hike in a first move after ending APP this year. The move lacked real follow-through action as Nowotny is a known hawk and doesn’t represent the (current) view of the ECB board. The US Note future held a steady range despite higher than expected US PPI data and the upcoming start of the mid-month supply operation. The German yield curve bear flattens at the time of writing (Nowotny mentioning deposit rate hike) with yield changes ranging between +1.4 bps (2-yr) and -0.8 bps (30-yr). The US yield curve shifts in similar fashion with yields up to 1.6 bps higher (2-yr). 10-yr yield spread changes vs Germany are almost unchanged with Greece underperforming (+7 bps).
Global markets entered calmer waters after comments from Chinese president Xi Jinping. USD/JPY rebounded north of 107, but there were no follow-through gains. EUR/USD didn’t go anywhere and settled in a tight range in the low 1.23 area. Early afternoon, markets were spooked by comments of ECB’s Nowotny (cf supra). Nowotny is a well-known hawk. FX markets still reacted to the fact that an ECB member re-opened the debate on the specifics of the ECB rate hike path. European yields gained marginally ground and the euro jumped higher. EUR/USD filled offers in the 1.2375 area. A bit later, the US PPI data were slightly higher than expected, but the report had hardly any impact on US yields and on the dollar. USD/JPY still struggles to hold north of 107. EUR/USD trades in the 1.2360 area. For now, the dollar still hasn’t regained the pre-payrolls positive momentum. The Nowotny comments even give the single currency the benefit of the doubt. Will tomorrow’s US CPI be able to change the balance again.
Sterling was supported by comments from BoE MPC member McCafferty this morning as he said that the BoE shouldn’t delay hiking rates as he sees upside inflation risks. EUR/GBP drifted temporary below the 0.87 handle. However, the intraday EUR/GBP decline was completely reversed after the comments from ECB’s Nowotny. EUR/GBP trades again in the 0.8720 area. Cable still preserves part of the intraday gain (currently 1.4170 area).
News Headlines:
US producer price inflation accelerated more than forecast (0.3% M/M & 3% Y/Y vs 0.1% M/M & 2.9%Y/Y consensus). Core PPI’s also beat consensus. The data reflect a broad increase in the costs of services and goods. Proposed tariffs threaten to raise costs of imported materials for US manufacturers further. NFIB Small Business Optimism unexpectedly declined from 107.6 to 104.7 (vs 107 forecast), the lowest level since October last year. The main reason for setback was the lower amount of small businesses who expect a better economy going forwards.
EUR/NOK rose from 9.60 to 9.65 following disappointing Norwegian CPI data (0.2% M/M & 1.2% Y/Y) which dented rate hike bets. The swoon in the Turkish lira continues with EUR/TRY now clearly above 5 in the wake of yesterday’s announced investment package which should, in combination with lower interest rates (despite already double digit inflation), boost the economy (risk of overheating!!). The Russian rouble still feels the sting from this weekend’s new US economic sanctions. The ministry of Finance had to pull a planned bond sale at the very last minute because of surging yields. EUR/RUB currently trades north of 78, coming from this week’s opening level of 71.
