Earlier this week, bond investors cautiously adapted positions pondering the chances for a gradual reduction of bond buying, both at the ECB and the Fed. Regarding ECB tapering, the move was inspired by an unexpected jump of the EMU August headline inflation to 3.0% and some subsequent hawkish comments. In the US, the tapering debate will be guided by the US labour market data. At the Jackson Hole Symposium end last week, Fed Chair Powell indicated that the ‘substantial further progress’ test was met for inflation. For maximal employment, the Fed (Chair) wants confirmation from the upcoming labour market data. In this context, yesterday’s big miss in the August ADP private job creation killed an admittedly mild rise in US yield. The European interest rate market this time didn’t disconnect anymore and joined the modest, US driven setback. Today’s data calendar was not strong enough to revive the market dynamics ahead of tomorrow’s key US payrolls report. Still EMU July PPI inflation rose a faster than expected 2.3% M/M and 12.1% Y/Y. The release hardly left any trace on European (interest rate) markets. The same applied for a marginally better than expected US weekly jobless claims (340k from 354k vs 345k expected). In technical trading, US yields are easing less than 1 bp. Contrary to what was the case of late, Bunds outperformed with yields returning a very small part of recent rise (-1.5 bp for 10-y yield). A similar range trading patter developed in European equities, with indices wavering near unchanged levels. The S&P and the Nasdaq continue to set daily record levels, admittedly at a snail’s pace. The post-OPEC+ setback in the oil prices was short-lived. Bent is holding well above the $ 70 p/b reference (currently 72.40).
Trading in the major currency cross rates didn’t deviate the lethargy on interest rate markets. The dollar is holding near recent correction lows with the DXY index at 92.44. The US currency probably needs convincing payrolls to prevent further losses. At the same time, the euro easily maintains recent gains. EUR/USD is changing hands in the 1.1850 area. EUR/JPY (130.40) still follows the established uptrend channel. The 130.50/55 resistance area is coming with reach. EUR/GBP is holding near the 0.86 area, but also in this cross rate a meaningful technical break isn’t in the cards today.
Switzerland published a slew of key economic variables today. Inflation accelerated in August, from 0.5% y/y (0.1% m/m) to 0.8% y/y (0.5% m/m), the fastest pace since 2019. Core inflation was a more muted 0.4% y/y (up from 0.2%). Sector-wise, services inflation stood at 0.5% y/y (from 0.3%) and inflation in the goods sector rose from 1.3% to 1.4%. Base effects skewed the yearly figure to the upside but monthly dynamics showed a positive impact also from clothing and shoes, education, restaurants and housing rent. Swiss GDP expanded 1.8% q/q in 2021Q2, to be 7.7% higher y/y, after contracting 0.4% q/q (-0.7% y/y) in Q1. The economy is now just an inch away from reaching pre-pandemic levels. Government consumption grew a very strong 5.5% q/q, outpacing that of households (4.1% q/q). Investments recovered from a dip in Q1 with 1.6% growth. Net exports’ contribution to the Q2 GDP was positive.
The UN’s Food and Agriculture Organization said world food prices rose again in August after two consecutive months of declines. The index (127.4) is now close to the decade-high reached in May this year (127.85). The sugar index rose 9.6% from July over concerns of frost damage to crops in world’s largest sugar exporter, Brazil. Vegetable oil prices advanced 6.7%, driven by historic highs for palm oil while rapeseed oil and sunflower oil also rose further. The FAO’s cereal price index was also 3.4% higher in August, the organization said, with, a.o. lower harvest expectations pushing prices of wheat by 8.8% m/m.