We saw some return action of last week’s extraordinary flattening move of the long end of the US curve yesterday. The front end of the curve stuck to most of its post-FOMC gains. The daily scorecard shows a bear steepener: US yield increases between +0.1 bp (2-yr) and +9.6 bps (30-yr). Especially inflation expectations, but also real rates added slightly to the move. The eco calendar was empty, but more Fed governors shared personal views following last week’s FOMC meeting. St-Louis Fed Bullard already on Friday confirmed that the tapering debate is alive and that he had a 2022 rate hike ticket. Yesterday he stressed to be ready for the idea that there is an upside risk to inflation and for it to go higher. Dallas Fed Kaplan wants the tapering of the current open-ended $120bn/month quantitative easing program to start sooner rather than later. Both Bullard and Kaplan are non-voters this year. At the other end of the Fed spectrum, you find NY Fed Williams -” who does have a permanent vote. Williams is on the side who feels that the US still has a long way to go to get back to full strength on the labor market while he firmly believes that inflation will come down to close to 2% in 2022 and 2023. Williams is one of the most dovish governors around, adding that substantial further progress is needed on both employment and inflation (overshoot) before starting any tapering. The written statement of Fed chair Powell’s hearing in front of the House Subcommittee on the Coronavirus Crisis is already released but didn’t deviate from last week’s policy statement and Q&A session. We continue to closely follow up on additional Fed comments as they will shape expectations around the timing and the process of tapering later this year. Cleveland Fed Mester and SF Fed Daly feature on today’s agenda.
Other markets yesterday corrected as well on the post-FOMC move. It looked a lot like a reflation vibe with US stock markets adding 0.8% to 1.75% and cyclical outperforming. The European comeback was restricted to +0.5%. The dollar rally ended with the trade-weighted greenback closing at 91.90 from a 92.31 open. EUR/USD ended at 1.1919 up from 1.1883. Short-term technical pictures continue to favor the dollar though. In technical trade, EUR/GBP is drifting towards the softest levels since early April (around EUR/GBP 0.8550) ahead of this week’s Bank of England meeting. We don’t expect a lot from the intermediate update with the August meeting being the key one (new monetary policy report). Today’s eco calendar contains the US Richmond Fed Manufacturing index and EMU consumer confidence. We don’t expect them to interfere with trading dynamics. The US Treasury starts its end-of-month refinancing operation with a 2-yr Note auction which could grab more attention than usual after the recent pick-up in yields at the front end of the curve. Speeches by ECB governors Lane and Schnabel are wildcards for trading. EMU bond yields have been trading relatively stable against the background of volatile US rate markets.
A group of bipartisan senators said they are moving closer to agreeing on a proposal for an infrastructure compromise bill worth $579 billion. Gaps remain, however, including on how to pay for the plan with one of the proposed measures, indexing the gasoline tax to inflation, being opposed by the White House. The Biden administration has been pushing to increase funding for the IRS instead. According to their estimates, $80bn more funding would raise some $700 billion in additional tax collections over a decade. The Congressional Budget Office however forecasts that increase funding by half that amount would yield “only” $103bn.
The UK has formally started negotiations to join the CPTPP, a trans-Pacific trading bloc whose members include Canada, Japan, New Zealand, and Mexico. Joining the trade organization would make it easier for professional services and financial firms to sell into new markets, the UK’s Department for International Trade said. The UK last week struck its first individual trade agreement negotiated from scratch since it left the EU with one of its members, Australia, and is in negotiations with other countries, including the US, as well.