A moderation in US yields facilitated benign global trading yesterday. The correction was modest and didn’t change the broader steepening trend. US yields declined between 0.2 bps (2-y) and 3.5 bps (30-y). The correction was due to lower real yields (-4.25 bps 10-y). While modest, it supported interest rate sensitive (US) equities, with the Nasdaq profiting most (1.23%). Gains in the more cyclical oriented indices were less (Dow 0.32%; S&P 0.70%). Oil ($64 p/b) hardly regained ground after last week’s setback. German Bunds underperformed even as the ECB stepped up net weekly PEPP purchases from €14 bln to 21.1 bln, reinforcing its commitment to prevent an unwarranted tightening of monetary conditions. ECB’s Knot said that an acceleration in the pace of vaccinations might start the debate on tapering as soon as this summer. The low volatility environment weighed slightly on the dollar (DXY close 91.74). EUR/USD closed at 1.1933. EUR/GBP started a third try to leave the 0.8530/40 support (close 0.8607).
Asian equites opened in green but the WS-inspired gains evaporated soon even as US yields are easing further. Chinese equities (CSI 300) are struggling not to fall below the 2021 low. The yuan is drifting lower too (USD/CNY 6.5125). The combination of weak equities but at the same time lower US yields turns out mixed for the dollar. USD/JPY eases slightly (108.75), but the DXY gains marginally (91.90). EUR/USD is trading little changed (1.1925).
EMU and US eco data are second tier, but the calendar contains an impressively long list of Fed speakers that might provide some insight on the internal debate within the FOMC. Fed’s Powell and Treasury Secretary Yellen appear before a House panel. Powell’s written preparation is already available. The Fed chair reiterates that progress is developing more quickly, but the recovery is far from complete. The US Treasury starts its auctions with a sale of $60 bln of 2-y notes. The markets focus will mainly be on the 5-y and 7-year sales later this week. Even so, the sales are a barometer whether recent cheapening already attracts new investor interest. On the FX markets, the difference in the pace of vaccinations/the prospects for a reopening of the economy, was an important driver last month. Germany imposing a strict Easter lockdown and extending other measures, only illustrates that the way to ‘normality’ in Europe remains long. Other countries are moving on the same direction. For now, additional euro losses remain modest, but a downside test of the 1.1936/1.1990 range looks more likely than a try to break the topside. EUR/GBP regained 0.86, but we stay cautious on a sustained rebound. 0.8640 is intermediate resistance ahead of 0.8731 which we expect to hold until there is better news from Europe.
New Zealand PM Ardern announced to phase out the ability of investors to claim mortgage interest rates as a tax-deductible expense and to extend the period in which profits on the sale of investment property are taxed from 5 years to 10. The government introduces the measure as some indicators point towards the risk of a dangerous housing bubble. The lion share of house buyers are currently property investors with double digit annual house price inflation squeezing out first-time buyers. The kiwi dollar loses ground this morning with NZD/USD below 0.71 for the first time this year. The NZ government as recently as last month instructed the Reserve Bank of New Zealand to take the property market into account when setting monetary policy. That guidance triggered early rate hike anticipation bets, which are now scaled down with the government doing part of the job.
UK labour market data printed on the weaker side this morning. Employment dropped by a smaller than expected 147k in the three months to January with the unemployment rate topping off at 5% over the same period. Growth in average pay rose by 4.8% over that same period (4.2% excluding bonuses). February jobless claims increased by 86.5k, in what’s a third consecutive monthly increase. The claimant count rate matched the 7.5% of workforce cycle high. When compared with February 2020, 693k fewer people were in payrolled employment in February 2021.