Today wasn’t as gloomy as yesterday but that’s basically it. European stocks opened in green with gains of about 0.5-1% but those evaporated as the session evolved and turned more grim. WS opens with minor, unconvincing gains. Testament to the pessimistic global sentiment is the further significant decline in core bond yields. US yields again shed several bps with the belly of the curve outperforming wings. That said, short tenors still decline 2.4 bps (2y) as markets further price out Fed rate hikes. Other declines vary from -6.7 bps (5y) to -3.5 bps (30y). The 10y (-4.6 bps) heads further south after breaking support around 1.20%. Technical charts now suggest a return towards 1%. German Bunds rally as well with the curve bull flattening -3.4 bps in the 2y to -6.7 bps in the 30y yield (now 0.02%) that’s on his way towards 0% again for the first time since February. The -0.40% reference for the 10y variant is being crushed as we speak, bringing the next target of -0.46% on the radar. There might be some additional uncertainty weighing on Bund yields with a potentially pivotal ECB meeting on Thursday approaching. Markets will await more details on the strategy review and are perhaps even more keen on Lagarde’s view on recent market developments. She has always pushed back against any unwarranted yield rise but surely Lagarde can’t feel comfortable with what’s happening currently either. Peripheral spreads widen further with Greece (+4 bps) underperforming. Today’s currency markets are a copy paste of yesterday with the Japanese yen shining as it fulfills its safe haven role. EUR/JPY closes in on support at 128.46. About a week ago, the pair traded around 131. USD/JPY is in a power struggle around 109.45. EUR/USD held up well initially but bowed to the risk-off eventually. The combination slips sub 1.18 below previous intermediate support zones to 1.175/6 currently. From here on out, there’s nothing that prevents the pair from sliding back to the 1.1705 March 2021 low. Sterling saw its momentum undermined yesterday by dovish BoE comments combined with total risk-off and isn’t spared a day off today. EUR/GBP extends its escape from the downward sloping trend channel to 0.866. It has now its eyes set at the 0.87 resistance area. GBP/USD breaches below 1.36 for the first time since February.
Price pressures in the Czech Republic and Poland remain elevated and higher than expected, June producer price data published today showed. Producer prices in the Czech Republic rose 0.8% M/M and 6.1% Y/Y (was 5.1% in May). Polish PPI inflation rose 0.7% M/M to be up 7.0% Y/Y (from 6.6% in May). On a monthly basis, producer prices rose for all subcategories (manufacturing, electricity & gas, water and construction). Mining and quarrying was the exception with a monthly easing (-2.2%). Still, prices in the sector were 19.3% higher compared to the same month last year. At the same time, the Polish Statistics office also report industrial production to have rising by a solid 4.0% M/M and 18.4% Y/Y. This was down from 29.8% Y/Y in May, but y/y data are highly affected by base effects from last year. A rise of 4.7 % M/M in June manufacturing output did catch the eye. In an interview with Polish newspaper Dziennik Gazeta Prowna, National Bank of Poland governor Glapinski reiterated his dovish view that it would not be reasonable to raise interest rates before the situation with respect to the pandemic clears up. The discussion on adjusting policy might start in the coming quarters, but the Glapinski puts the bar high as the bank needs to be sure that the pandemic will no longer disrupt economic activity, with inflation at risk of staying permanently above the tolerance band (2.5% +/- 1.0%) and CPI to be driven by a demand-side factors. On the FX market the zloty is holding near recent weakest levels against the euro (EUR/PLN 4.60 area). The Czech koruna slightly outperforms probably on the further decline in core bond yields, with EUR/CZK easing to 24.65.