PBOC RRR cut rumours and the resulting risk-off were yesterday’s main drivers, totally eclipsing the ECB’s strategy review announcement. Stocks tumbled more than 2% in Europe as lingering growth concerns reached a culmination point. US stocks shed more than 1.5% in early trading but an intraday recovery capped losses at less than 1% eventually. We saw a similar pattern in core bond yields as well. Long tenors first tanked 4 (Germany) to 6 (US) bps only to pare losses as some calm returned. The US curve bull steepened with markets further pricing out Fed rate hikes, pushing yields 2.1 bps to 3.7 bps lower in the 2y-5y segment. The decline in the 10y and 30y eased with losses of ‘only’ 2.3 bps and 1.1 bps and were, unlike previously, driven by faltering inflation expectations. The German curve fully reversed an initial bull flattening to finish unchanged. The euro shook off an ugly two days and excelled along with safe havens including the yen and Swiss Franc. That happened even before panic on bond markets ebbed away. EUR/USD rebounded from south of 1.18 to close at 1.1845. USD/JPY slid to below 110. Euro strength and minor sterling weakness propelled EUR/GBP from the 0.855 June support area towards but below 0.86.
Core bond yields hold up pretty well during Asian dealings after more or less stabilizing yesterday. US yields rebound almost 4 bps, confirming (for now) the hammer candlestick painted on the technical charts yesterday. Equity sentiment remains fragile though with most indices in the red. SK underperforms after imposing stricter corona measures. Other news is limited to Chinese inflation figures (cf. infra). The dollar is strengthening a tad, the yen lags.
In absence of a meaningful economic calendar, general sentiment will be in the driver’s seat once more. We have to watch our words but it looks like the outright panic and aggressive bond repositioning of earlier this week might ease. We’ll be looking for the start of some bottoming. First resistance lies at 1.35% for the US 10y and -0.3019% followed by -0.287% for the German variant. While EUR/USD’s downside still eyes fragile from a technical point of view, we assume the overall easing of market tensions to provide at least some protection if not more. This week’s low at 1.1782 in any case must hold to call off the immediate downside alert. The bickering between the UK and the EU doesn’t ever stop it seems. Earlier it was about the NI protocol, now it’s about the money the UK would pay the EU related to commitments made when it was still a member state. Both had an agreement in the so-called divorce bill though the EU suggested the due amount has risen. For the moment, sterling doesn’t really care and the issue probably won’t break the EUR/GBP stalemate either. The pair remains trapped in a protracted downward channel.
The National Bank of Poland kept its policy rate unchanged at 0.1%. The NBP will continue to buy government securities. The policy statement was similar to last month’s. Annual inflation will probably stay above the upper band for deviations from the inflation target (2.5% +/- 1.0%) in the coming months. However, an important part of this rise is seen as temporary and due to factors that are beyond control of monetary policy. At the same time, growth and inflation projections were upwardly revised from March. Growth for the years 2021/23 is seen near 5%. While keeping an optimistic tone on growth, the NBP still mentions that the pace of the recovery will depend on further developments of the zloty. Interventions remain a policy option. The NBP didn’t give hints on policy normalization, but given high inflation and strong growth, conditions might evolve. Next forecasts are available at the November policy meeting. The zloty yesterday weakened toward EUR/PLN 4.55, but that was mainly due to the global risk-off.
Chinese price data published this morning showed a tentative easing of the inflationary momentum. June producer prices eased from to 8.8% from 9.0% in May as policies to ensure the supply and stabilize commodity prices began to take effect. Consumer price inflation slowed from 1.3% to 1.1%. Food prices contributed to the decline. Non-food prices and fuel prices fueled to inflationary pressures. Core inflation was 0.9% Y/Y (unchanged from May) and shows limited pass-through effects from producer price to end users.