Asian and European markets today had to cope with growing worries on inflation that haunted US (equity) markets later in the session yesterday. European equities lose up to 2.5%. US indices are ceding another 1% (Dow) to 1.6% (Nasdaq) soon after the open. Investors apparently reached the point where they are not sure anymore whether skyrocketing commodity prices and a congruent rise in inflation expectations are a harbinger of a protracted economic recovery. Higher costs can become a headwind for corporate earnings and/or consumers’ disposable income. The recent sharp rise in (cyclical) commodities like iron ore or copper slows, but the metals stay within reach of record levels with no clear sign of a meaningful correction. Rising inflation expectations outweigh a global risk-off sentiment as a driver for German/EU interest rate markets. The German yield curve bear steepens with yields rising between 0.2 bp (2-y) and 4.5 bp (10-y). The European 10-y inflation swap (1.63%) extends its rise, nearing the 2018 top (1.70%). German ZEW investor confidence (expectations at 84.4) jumped to the highest level since end 1999, illustration growing investor confidence in the economic rebound. However, this positive narrative for sure wasn’t the driver for today’s rise in core yields. Still the German 10-y yield (-0.16%) is nearing the -0.15/-0.14% key resistance. At least today, the rise in core yields combined with a global risk-off climate has only a modest impact on intra-EMU yields spreads versus German (Italy +1 bp). However, in a broader perspective the bottoming in spreads combined with a rise in core yields is pushing the Italian 10-y yield (0.98%) to the highest level since mid-September. US Treasuries today outperform German bunds. US yields are rising up to 2.25 bp (10-y). US 10-y break-even inflation stays north of 2.50%. The jury is still out, but the 10-y real yield (-0.91%) shows tentative signs of bottom after yesterday’s spike lower.
As is the case for ‘save haven‘ core bonds, the risk-off repositioning this time doesn’t help the dollar, on the contrary. The trade-weighted index (DXY) is at risk of losing the 90 big figure (90.10). EUR/USD (1.2165) tested the short-term top near 1.2180. The end February intraday peak (1.2243) remains final intermediate resistance ahead of the 1.2349 year high. USD/JPY also suffers (108.43), but the yen hardly outperforms the euro with EUR/JPY holding strong in the 1.3180 area. Sterling is taking a breather after yesterday’s impressive rebound. EUR/GBP tested intermediate support in the 0.8590 area, but a sustained break didn’t occur (0.8602 currently). Broad USD weakness also limits the damage for smaller currencies despite the global risk-off. Losses for the likes of the zloty (EUR/PLN 4.55), the Czech koruna (EUR/CZK 25.58) or the forint (EUR/HUF 358.25) are negligible (if any). Today, Czech (3.1% Y/Y) and Hungarian inflation (5.1% Y/Y) also surprised on with higher than expected readings.
Australia will continue to keep the fiscal taps open, eying a budget deficit of A$106.6bn in the fiscal year ending in June 2022, Treasurer Frydenberg’s budget details showed. The 5% of GDP large deficit exceeded economists’ A$80bn estimate and follows an almost 8% gap in 2020. Deficits are expected to decrease gradually to about 2.5% in 2025 to have a net debt then of 40.9% of GDP. Spending for the next fiscal year includes A$8bn in tax relief extensions to low- and middle-income earning Australians, A$15bn for road and railway projects and A$18bn for the aged care sector.
OPEC in its monthly report raised 2021 demand for its own crude by 230 000 b/d (to an average of 27.65 million a day) as US supply is now expected to shrink rather managing a modest recovery. It kept global oil demand for this year unchanged though upgraded world growth from 5.4% to 5.5%, citing US stimulus measures and an accelerating recovery in Asia. The analysis comes as the oil cartel kicks of the first month of gradually increased output that will bring back more than 2 million barrels a day by the end of July.