The combination of sharply higher US inflation yesterday and, a few hours later, a poorly accepted US 30-y auction temporarily triggered a corrective move on recent trends of persistently low/declining (US) yields and a flattening yield curve. However, a pause obviously isn’t a trend reversal yet. During the morning session, the flattening trend resumed as investors counted the down for the US PPI data and for Fed Powell’s appearance before the House Financial Services Committee. The US May PPI copied the yesterday’s message from the CPI’s with both final demand PPI (1.0% M/M and 7.3% Y/Y) and underlying measures signaling accelerating price increases. Still the (bond) market didn’t see much new. In the transcript text for the House hearing, the Fed chair still holds the line from after the June policy meeting. Most FOMC members apparently still assess expect that, while further progress will continue, the standard of substantial further progress that is needed to start scaling back of asset purchases, hasn’t been met. Powel acknowledges rising prices due to bottlenecks and supply constraints, but stops shorts of labeling this as the potential start of sustained prices rises yet. He still downplays the risks to financial stability of the persistent ultra-supportive policy. This ‘balanced’ assessment provided the all-clear for markets to resume its recent habits. The US yield curve bull flattens with yields declining between 2 bp and 4.5/5.0 bp (30-y & 10-y). The German yield curve followed the path of least resistance declining between 0.1 bp (2-y) and 2.1 bp (30-y). Oil gaining some modest ground after the UAE and Saudi Arabia reached an agreement on future production. Again it didn’t revive any reflationary spirits on core bond markets. Intra-EMU 10-y government bonds spreads are trading little changed. European equities show a mixed, indecisive picture. US indices are again near record levels as investors took comfort from several US big banks publishing Q2 earnings.
The dollar this morning still profited from yesterday’s rise in US yields. However, the resumption of the bull flattening yield trend didn’t help further USD gains. Losses even accelerated after the release of Powell’s testimony. EUR/USD tries to regain the 1.18 big figure. The trade-weighted DXY index failed to clear 92.85 resistance and currently again trades near 92.45. USD/JPY (110.15) struggles not to fall below the 110 mark. Higher-than-expected headline (2.5 Y/Y) and core (2.3%) UK inflation finally caused EUR/GBP to break below the 0.8530 support. The pair trades at around 0.8510, with the 0.08472 April low now within reach.
The Turkish central bank kept its policy rate unchanged at 19%. Earlier this month, June Turkish inflation unexpectedly jumped to 17.5% Y/Y. The Turkish central bank pledged to keep real interest rates positive and expects volatility in inflation during the summer due to the reopening. The CBRT for now withstands political pressure to reverse its tightening cycle. President Erdogan early June said that he spoke with the new central bank governor. He concluded that “it’s an imperative that we lower interest rates. For that, we will reach July and August thereabouts so that rates can begin to fall”. The Turkish lira trades a tad firmer, but EUR/TRY remains north of 10. It’s probably only a matter of time before the CBRT turns to unorthodox rate cuts, breaking ranks with tightening cycles in other emerging markets and highlighting the vulnerability of the lira.
The United Arab Emirates reached a preliminary oil agreement with Saudi Arabia which needs to be approved by all OPEC+ members and which would end the deadlock from earlier this month. The UAE last week blocked a tentative deal to raise oil production because it argued in favour for a higher (personal) production baseline. The UAE’s new baseline production will be 3.65mn barrels from April 2022 from about 3.17mn currently (locked in 2018 before infrastructure spending). In return, the Emirates now back the Kingdom’s proposal to extend the duration of the OPEC+ production cut agreement to December 2022. Brent crude remains near cycle highs around $76.5/b.