Today was a textbook waiting game on markets: no important economic figures, no guidance from the US (financial markets there are closed for Labour Day) and looming key events, including the Fed’s Beige Book on Wednesday and the ECB on Thursday kept investors guarding their outstanding positions from the sidelines. The result was directionless trading on most European markets. German bond yields floated around opening levels with yields unchanged for the day. Germany’s 10y yield did test -0.35% resistance for a third time in just four trading days but a break ahead of the ECB might be difficult to pull off. The European 10y swap yield took out the 0% on Friday but there are no follow-up yield gains today. If anything, that recent milestone is already under pressure again. Peripheral bond yields widen marginally in most countries. Greece (+4 bps) underperforms. Interestingly, Greek spreads have risen more than comparable peers recently. This might have been caused by ECB expectations forming in the market. We highlighted some time ago that the central bank’s upwardly adjusted growth and inflation forecasts together with easing financial conditions in September would give the window of opportunity to start scaling back the PEPP’s pace. It took until mid-August, however, for markets to start positioning for the same scenario. Since Greece is excluded from the central bank’s other purchase programmes (APP), the net impact on Greek bonds of scaling back PEPP is potentially bigger. On currency markets, the dollar held a slight advantage over most G10 colleagues. EUR/USD retreated from the 1.188 area to 1.187 currently. The trade-weighted USD ekes out a gain from 92.12 to 92.25. The dollar strengthening somewhat counterintuitively happens against the background of a risk-on, suggesting it’s a rather technical move. European equities advance <1%. The EuroStoxx50 is testing recent cycle highs around 4242. Other currencies including sterling barely budge. In Central-Europe, we note the underperformance of the Polish zloty after NBP governor Glapinski felt obliged to counter building market expectations for a rate hike in the short run (see headline below). The Hungarian forint tests ST-resistance around EUR/HUF 347 (last week’s forint high). The Czech krone loses territory but EUR/CZK’s trip isn’t going very far. The couple sticks to the 25.4 area.
Polish central bank governor Glapinski dented early tightening bets. He believes that for now, taking into account the nature of shocks that are behind high inflation as well as uncertainty about the pandemic and growth, tightening of the monetary policy would be very risky. His comments come just ahead of the September 8 NBP meeting. Three MPC members in July already called for a rate hike because of inflationary risks. Inflation only accelerated in the meantime with more governors siding with this growing minority and hyping the November meeting when new growth & inflation forecasts are available. Glapinski is still pushing back against a first hike, but markets still attach a >50% probability to such move in two months’ time. The governors is especially worried on zloty strength which comes with rising Polish rates. On QE, he added that it will stop once raising rates start, but that de facto the amount of purchases already slowed to a trickle. The zloty reversed part of last week’s gains with EUR/PLN gaining two big figures to 4.5250.
The UK construction PMI fell back more than expected in August, declining from 58.7 to 55.2 (vs 56 consensus). It’s the softest reading since February. IHS Markit reported that there were softer expansions across housebuilding, commercial work and civil engineering activity as well as in new order growth. Moreover, companies widely noted sustained, and severe, supply chain, which contributed to an accelerated rise in input prices, and one that was the second sharpest in the history of the survey.