Markets
Word is finally out. St. Louis Fed Bullard confirmed that the tapering debate started earlier this week and will continue in coming meetings. He believes that the Fed should no longer be active in the housing market given concern about froth there. This fits with our view that the Fed will scale down the $40bn monthly MBS purchases by the end of the year in the first tapering phase. He provided a little additional flavour by saying that the Fed committee has been surprised to the upside over the last half year or so. Personally, he’s on the side of upward inflation risk with a preference of hiking policy rates in 2022. US (long) Treasuries erased small gains after Bullard’s remarks. The move of the US yield curve is striking though with a huge underperformance of the front end. The US yield curve flattened in a daily perspective with yield changes ranging between +6.4 bps (3-yr) and -3.6 bps (30-yr). The dollar moved to today’s best levels after this interest rate support. Earlier on the day, the post-FOMC greenback comeback showed signs of stalling. The trade-weighted greenback in that move takes out 62% retracement (91.94) on the April/May slide. Similar support in EUR/USD already gave away yesterday (1.1919) with the pair trading below the 1.19 big figure for the first time since mid-April. Full retracement and next technical support kicks in at EUR/USD 1.1704.
Shaky stock markets play in the advantage of the dollar as well today. Main European indices lose around 1.5%. From a technical point of view, today’s move suggests more corrective action ahead. Narrative-wise, investors might effectively be inclined to some profit taking after the Fed acknowledged higher inflation risks and showed willingness to eventually act should things run out of control. Some rotation into bonds could help explain US Treasuries’ very recent performance.
Disappointing UK retail sales completed this week’s batch of UK eco data. Headline sales declined by 1.4% M/M, however after stellar results in April and March. Sterling didn’t really react though. EUR/GBP moved slightly higher in technically irrelevant trading, currently changing hands around EUR/GBP 0.8575. The next highlight for UK investors is next week’s BoE policy meeting.
News Headlines
According to data of the Polish Statistical office released today, wages in the country rose 10.1% Y/Y in May, up from 9.9% in April. Polish wages haven’t shown any double digit Y/Y growth since October 2008. Employment in May grew at a slightly faster than expected 0.3% M/M to be up 2.7% Y/Y. For now, the Polish central bank is holding to its view that it needs to continue to support the economy as it is emerging from the pandemic. Inflationary pressures are seen as mostly temporary. The zloty declined after last week’s dovish message from the NBP policy meeting. Regional currencies including the zloty lost further ground as the Fed dots projected a faster than expected policy tightening on Wednesday. EUR/PLN today found a ST equilibrium in the 4.55 area.
According to the May inflation attitudes survey of Kantar and the Bank of England, the British public’s expectations for inflation over the next year dropped from 2.4% from 2.7% in February. The Public’s assessment for the twelve months after that also declined from 2.2% to 1.9%. Longer term inflation expectations (5-y) also slowed (2.5% from 2.7%). Current inflation was perceived at 2.5%. Expectations on the trend of interest rates were mixed. 37% expect rates to stay about the same over the next twelve months, compared with 35% in February 2021. 39% of respondents expect rates to rise over the next 12 months, up from 35% in February 2021. The Bank of England announces its policy decision on Thursday next week.
