European stocks swooned at the start of dealings, but managed to limit losses afterwards. Main indices trade currently up to 0.5% softer. Main FI and FX markets felt no impact. On the contrary, yesterday’s moves were modestly prolonged. German yields add around 1.5 bps across the curve at the time of writing. Minutes of the previous ECB meeting showed an intense debate on rephrasing rate forward guidance. As a reminder: the new sophisticated instruction sounds like this: “the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. This may also imply a transitory period in which inflation is moderately above target.” Minutes specified that this doesn’t necessary mean lower for longer compared to the previous guidance of “the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.” A debate on the future APP was pushed forward to one of the coming meetings. We continue to believe that the September 9 policy meeting is a wildcard in this respect given new growth and inflation forecasts and given the approaching March 2022 PEPP end date. Chief economist Lane yesterday hinted that time is on the central bank’s side, allowing room to only tackle the issue in December. Apart from Minutes and fairly stable US jobless claims (353k from 349k), the waiting game to Powell’s Jackson Hole address continues. US yields add 0.2 bps (2-yr) to 2.4 bps (10-yr). The US 10-yr yield tests first intermediate resistance at 1.38% (August high & 38% retracement on April/July correction lower). The key question remains whether or not the Fed governor sets out a blueprint for tapering asset purchases. A mid 2022 end to net purchases in combination with an end 2022 first rate hike is more or less becoming consensus scenario and will be the benchmark to interpret any market reaction. The dollar treaded water near opening levels for most of today’s session (1.1770), but gains some momentum as US traders enter dealings. The pair is currently seen around 1.1750. Sterling is underperformer amongst FX majors today with EUR/GBP rising from 0.8550 to 0.8570 and cable sliding towards 1.37. Both moves have no technical significance.
In the first auction after the central bank announced another 30bps rate hike and a reduction in the (weekly) amount of bond purchases, the Hungarian government cut back bond sales. The Government Debt Management Agency (AKK) sold 5bn HUF in a 5y auction (vs a 20bn HUF offer), 20bn HUF in a 10y auction (matching offer) and 10bn HUF in a 15y auction (vs 15bn HUF offer). Average yields at which were sold were up in every tenor compared to the previous auction and are up 5bp at the long end of the curve.
In its monthly economic report, the Japanese government said the economy continues to pick up but conditions remain severe due to the resurgence of Covid-19 infections and the resulting extended state of emergency curbs. It used stronger language when it warned for increased downside risks caused by the pandemic. It described consumer spending as weak, especially in the services sector. Given sluggish household demand, the government cut its assessment on imports for the first time in 10 months. It turned more optimistic on corporate profits though due to solid Q2 earnings among manufacturers as export strength continued.