Long term bond yields are pushing ahead. The German 10-yr yield yesterday broke through -0.35% resistance which served as 38% retracement on the May/August decline. The 62% retracement level stands at -0.25%. The EU 10y swap rate again trades firmly above 0%. The US 10-yr yield jumped after Labour Day Holiday for a test of 1.37% resistance. That’s also 38% retracement, but of the March/July decline and a level already tested twice in August. The 62% retracement level stands at 1.53%. On first sight, the increase in nominal yields looks very familiar between Germany and the US, with curves steepening as well on both occasions. However, underlying dynamics reveal that the US yield increase is much more guided via higher real rates whereas the German yield increase can be much more contributed to higher inflation expectations. The US 10y real yield closed above -1% for the first time since mid-July while its German counterpart is still stuck below -2%. German inflation expectations on the other hand moved above the 2018 top (1.68%) to reach the highest level since 2013! In absence of significant data prints these dynamics, which by the way helped the dollar against the euro (EUR/USD < 1.1850), might tell us something on final positioning going into tomorrow’s ECB meeting and the September 20 FOMC meeting. On the one hand, they fear that the dovish wing within the ECB will continue to guide soft policy despite more recent neutral comments suggesting a slower pace of PEPP purchases in Q4 (our preferred scenario). On the other hand they indicate that the neutral/hawkish wing within the FOMC is strong enough to force a tapering announcement despite Friday’s less-than-hoped US payrolls (also our main case). Our conclusions towards core bonds is that they will suffer more in September. Regarding the single currency, it will be the ECB that tomorrow decides on the possibility of a fresh leap north, potentially above EUR/USD 1.1909 resistance.
Today’s eco calendar remains rather thin. US JOLTS deserve some more attention given the growing mismatch in US labour demand/supply. The US Treasury continues its mid-month refinancing operation with a 10-yr Note auction after yesterday’s good 3-yr Note sale. We’re eager to see whether investors will already be lining up to pick up Treasuries after the recent setback. The outcome will be telling for sentiment. A speech by NY Fed Williams – one of the final doves standing – could reveal more on the September meeting. Did the doves surrender, embracing a taper announcement in September and start in Q4?
Thousands of Bolsonaro’s supporters rallied in the streets yesterday. The Brazilian president called for them to do so to shore up his political base and improve his standing in the polls. Bolsonaro is increasingly being criticized for what is considered growing authoritarianism that according to the Supreme Court justice Moraes is disrespecting the democracy. Bolsonaro’s approval ratings sunk to about 25% ahead of the 2022 general elections, which Bolsonaro threatened to cancel saying the current system is prone to fraud and has to be amended. The Brazilian real is holding pretty steady in recent days despite the political disturbances. USD/BRL trades around 5.17 currently.
The UK’s Financial Conduct Authority’s chair Randell warned consumers need to be protected from dubious crypto investments promoted online. He said urgent action was needed to stop the “pump and dump” tactics for new coins, used to lure investors often via social media influencers. His comments came as the UK Treasury considers giving the FCA a larger role in controlling crypto assets promotion under tighter standards that also apply to traditional financial products. In other crypto news, El Salvador as world’s first country adopted bitcoin as a legal tender yesterday. Its wallet system crashed hours after the announced however, causing a massive BTC selloff that amounted at some point to 17%. El Salvador’s president Bukele said he bought the dip in response, scooping up another 150 coins to bring the country’s total to 550.