It was back to square one for US yields yesterday as a balanced statement by Fed Chair Powell lifted core bonds again to levels seen ahead of Wednesday’s inflation & auction scare. The main message remains that the recovery has further to go to scale back extraordinary monetary policy support. He stands by the view that the inflation uptick will be transitory though added that the Fed will act should things spiral out of control. The US yield curve bull flattened with yields shedding 3 bps (2-yr) to 7.6 bps (30-yr). US Treasuries significantly outperformed German Bunds with German yields down 0.7 bps to 3.4 bps in a similar flattening move. The dollar reversed part of Wednesday’s gains with EUR/USD closing at 1.1837 from a 1.1776 open. EUR/GBP saw some return action higher after failing to breach the 0.85 barriers on the downside. Hawkish comments by BoE Ramsden couldn’t change the tide. He said that conditions for tightening policy could come sooner than expected in the forecasts of May. Sterling will probably keep the edge over the euro in the run-up to the August 5 Monetary Policy Report. BoE Saunders today also speaks on the UK (inflation) outlook and could echo Ramsden’s more hawkish views. Mixed UK labor market data this morning fail to inspire trading.
Chinese Q2 GDP numbers slightly beat consensus this morning, rising by 1.3% Q/Q vs 1% expected. Q1 growth dynamics faced a downward revision from 0.6% Q/Q to 0.4%. GDP is 7.9% higher on a yearly basis. The solid GDP release comes on the heels of the PBOC’s RRR cut and dovish guidance last week. The latter was seen as an omen for worrisome data today. Monthly data ranging from production (8.3% Y/Y) over-consumption (12.1% Y/Y) to investment (12.6% Y/Y) all confirmed the Chinese growth momentum. Yearly comparisons again start making some more sense since Chinese growth was mainly affected by pandemic-related lockdowns in Q1 2020. USD/CNY is fairly stable around 6.46. In other Asian news, the Bank of Korea signaled that it’s time to discuss policy adjustments from the next meeting (Aug 26) onwards. USD/KRW drops to the 1140 area after testing strong resistance around 1150 in the past days. Finally, June Australian labor market data printed close to consensus (+29.1k). Details were even slightly more upbeat with full-time job gains (+51.6k) compensating for part-time job losses (-22.5k). The unemployment rate declined from 5.1% to 4.9% with an unchanged participation rate (66.2%). The slightly tighter labor market supports the RBA’s recent call not to extend the benchmark for 3-y government bond purchases.AUD/USD is broadly unchanged near 0.7470.
The Bank of Canada further scaled back bond purchases from CAD$ 3bn per week to CAD$ 2bn yesterday, citing an ongoing and strengthening economy that is to broaden in the months ahead. Employment should continue to rebound through the BoC warned recouping the still more than 500 000 job losses will take time. It remains upbeat in its growth forecasts, lowering the figure for this year to 6% (-0.5 ppt) but revising 2022 GDP growth to 4.6% (+0.9 ppt). It won’t be until the second half of 2022 before economic slack is absorbed. This should bring inflation sustainably to the 2% target (2.4% in 2022, 2.2% in 2023). The policy rate, now at 0.25%, won’t be raised until then.QE could be tapered further if the economy evolves according to forecasts. The loonie reversed earlier gains on the news as yesterday’s decision was already discounted by markets. This raised the bar for a hawkish surprise. USD/CAD eventually closed unchanged at 1.251.
Poland put a bomb under the primacy of EU law. Its constitutional court ruled that the country does not have to obey EU orders related to a judicial overhaul that the EU considers breaching the rule of law. One of the judicial changes introduced a new chamber for disciplining judges, which the EU ordered Poland to suspend. It is that very chamber that asked the Polish court to rule whether such demands were compatible with the constitution. The decision most certainly will escalate the feud. The Polish zloty came under selling pressure these last few days, partially the result of building tensions in the run-up to the court’s decision. EUR/PLN currently trades at 4.58.