Today, the ‘China-induced’ turmoil that spooked US and European markets earlier this week finally subsided. Eco data were mostly second tier. The US June Merchandise trade deficit rose to the second widest on record at $91.2 bln as imports (1.5%) rose more than exports (0.3%). However, with the focus on growth and on inflation, the market currently isn’t occupied with this deficit issue. In technical trading ahead of the Fed policy decision, the US yield curve slightly steepens with the 30-j rising up to and 2.5 bp. Still the technical picture remains fragile as the 10-y yield (1.265%) is holding in the 1.20/30% corridor. This fragile underlying sentiment was also visible in German bunds with yields declining marginally (<1 bp) except for the 30-y yield. At -0.44%, the Germain 10-y yield is even testing the lowest level since February. European equities gain about 0.75% on average. US indices struggle to stay in green. The dollar gains marginally, but also in FX there is no clear directional drive as investors await the Fed policy decision and press conference later today. EUR/USD hovers around the 1.18 barrier. USD/JPY tries to regain the 110 pivot. Sterling remains well bid, as EUR/GBP nears the lower bound of the 085 big figure. Investors apparently are growing more confident that the reopening of the economy can avoid a material setback.
The key market event evidently still has to take place with the Fed policy decision and press conference of Fed Chair Powell later today. No Fed policy change is expected. The Fed will probably acknowledge the continuation of the recovery even as risks (delta variant) persist and as the labour market has a long way to go to reach the Fed’s full employment target. Inflation will likely still be labelled as temporary, but we look out for subtle changes in tone or a stronger reconfirmation that the Fed will take action ‘if necessary’. The process of ‘thinking about thinking about tapering’ will continue, but more concrete guidance is only expected in August (Jackson Hole) or at the September meeting (with new forecasts). Interesting insights maybe have to come for the press conference rather than from the official statement. Any specification on what the Fed sees as ’temporary/transitory’ (on inflation) would be interesting. We’re also keen to hear Powell’s view on the developments in the (bond) market. Low long-term yields can be seen as ‘favourable financing conditions’ supporting the recovery. However can a central banker be happy with the aggressive flattening of the yield curve and historically low real yields at this point in the economic cycle? A steeper curve might give more comfort on markets’ (and other economic agents’) confidence in the economic recovery. In any case, it won’t be easy for Powell to commit on supporting growth and maintain its credibility on inflation at the same time. From a technical point of view 1.12% and -0.47% are next support levels on the charts for the US and German 10-y yield respectively. The dollar recently took a pause, but no important support has been broken yet. Powell’s tone on whether or not the Fed will give more weight on inflation is important. No change in the ‘temporary inflation narrative’ cause some further USD easing EUR/USD 1.1881/1895 (currently 1.1820) and DXY 92.00 (currently 92.50) are first technical reference on the charts.
In an interview with Bloomberg, Deputy governor Thomas Nidetzky of the Czech National Bank (CNB) advocated the CNB should keep lifting policy rates at a swift pace as the economy is rebounding significantly faster than the bank had forecasted. Despite the continued risks of uncertainties, the CNB wants to send a signal that it won’t tolerate elevated inflation. In this respect, Nidetzky said that an important topic that sets the Czech Republic apart from other countries is that the country’s ‘labour market hasn’t cooled down and is in fact back where it was before the pandemic’. In this context, he supports an additional rate hike at next week’s meeting, and said he can imagine rate hikes at each subsequent meeting until new factors are in play. In a milder risk context, the krona rebounded today with EUR/CZK trading near 25.63.