Sat, Sep 25, 2021 @ 18:14 GMT
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The US Treasury Ends Its Mid-Month Refinancing Operation

Markets

Core bonds ended their first trading session of the week near opening levels with a slight underperformance of US Treasuries. US yields added 0.1 bp to 1.3 bps with the belly of the curve outperforming the wings. German yield changes varied between -0.4 bps and +0.2 bps. Recall last week’s stellar, but rather inexplicable, core bond bull run which only met with corrective downward action on Thursday and especially Friday. The long end of EU and especially US yield curves remain mysterious with the combination of rock-bottom real yields and topping off inflation expectations either pointing at a much bleaker economic future than generally assumed, a central bank unable/unwilling to revert policy settings to normal or a combination of both. The suggestion that investment/Treasury flows are interfering each day becomes harder to defend. Yesterday’s US 3-yr and especially 10-yr Note auction went well even if the 10y was awarded at the lowest yield since February. The US Treasury ends its mid-month refinancing operation tonight with a $24bn 30-yr Bond auction. Before we arrive at that debt sale, US NFIB Small Business Optimism and CPI inflation are scheduled for release. We obviously eye the inflation print.Consensus expects last month’s headline 5% Y/Y reading to have been the peak in the cycle with a small moderation to 4.9% Y/Y expected. 5%+ inflation tended to have a scary impact on markets, sending both bonds and stocks lower. Recent market action suggests that the inflation bogeyman at least for now isn’t top of mind anymore. It will be thus be telling if we might see some weakness on an at consensus or higher CPI print. The underlying core inflation probably hasn’t reached its peak yet with consensus eyeing a rise from 3.8% Y/Y to 4% Y/Y which would be the highest since the end of 1991. EUR/USD remains stuck in the 1.18-1.19 zone this month with the greenback slightly taking the upper hand yesterday. The pair closed at 1.1861. In case of a potential bond reaction to the US CPI print, it will be the underlying drivers that determine the USD reaction function. Via the (likeliest) inflation channel, it could weigh on USD whereas higher real yields (Fed normalization) hang on the other side of the balance. A wildcard on today’s agenda is the start of Q2 earnings season (JP Morgan, Goldman Sachs). European/US stock markets eventually managed positive closes yesterday, but (EU) sentiment has been sluggish of late.

News headlines

Chinese exports unexpectedly grew 20.2% y/y in June. Imports rose at a faster (than expected) 24.2%, leaving the total trade balance at CNY 332.75bn. The better than expected readings are supportive for an economy that’s seen slowing from the post-pandemic surge as suggest by for example PMI business confidence. Chinese Q2 GDP figures due Thursday therefore will be under market scrutiny. Consensus expects growth to have accelerated to 1% q/q (from 0.6% last Q1) but slowed down to 8% y/y (from 18.3%).

The US administration is debating proposals for a digital trade agreement that covers a range of Indo-Pacific economies including Canada, Chile, Japan, Australia, and others, people familiar with the plans disclosed. The deal could set out standards for a digital economy that stretches from rules on the use of data, trade facilitation, and electronic customs arrangements. Doing so would mean a clear break with policy under former president Trump, who decided to withdraw from negotiations for the Trans-Pacific Partnership trade deal in 2017.

The British Retail Consortium said retail sales were 13.1% higher in June this year compared to the same period in 2019. Summer clothing and footwear along with Euro 2020 demand for snack food, beer, and TVs fueled the spending spree. In all of the second quarter, sales jumped 10.4%, delivering retailers their best quarter ever as cash piled up at in bank accounts after more than a year of restrictions. The BRC added though that the sector still suffers from low footfall as commuters and tourist numbers remain well below pre-pandemic levels.

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