The commodity/energy market rally grinded to a halt today while (European) risk sentiment flourished. The euro puts in a miserable performance against an overall strong dollar. The greenback even received an additional push in the back at the start of US trading. Headline August retail sales unexpectedly rose by 0.7% M/M. Excluding the volatile auto-related component, sales even jumped by 1.8% M/M and the control group – often seen as a proxy for consumption in GDP – surged by 2.5% M/M! Households redirected their consumption as covid-infections triggered more restrictive measures, but overall demand held up. Back-to-school sales also added to the positive surprise. The retail sales add to the tug-of-mar between doves and hawks within the FOMC, but also on markets. US Treasuries underperform German Bunds with next week’s key Fed meeting looming. The unexpected first increase in Philly Fed Business Outlook since April (30.7 in September from 19.4) complemented the retail sales release. Details were more mixed with shipments and a lengthening workweek offsetting declining employment and new orders. The forward looking indicator (+6 months) fell from 33.7 to 20. Price indicators show the pass-through from prices paid to prices received with the former extending its topping off process and the latter stable at a multi-month high. US weekly jobless claims bounced from 312k to 332k.
Anyway, returning to mister market. US yields add 1 bp (2-yr) to 4.6 bps (7-yr) in a daily perspective. The German yield curve bear steepens with yields adding 0.1 bp (2-yr) to 1.9 bps (30-yr). 10-yr yield spreads changes vs Germany are broadly unchanged. EUR/USD plummets from 1.1817 to 1.1750 with the trade-weighted dollar approaching 93 for the first time since the end of August. USD/JPY recovers yesterday’s lost ground, changing hands near 109.75. Sterling finally gets to profit from this week’s good labour market report, higher inflation outcome and short-term interest rate support. Risk aversion prevented gains earlier this week. EUR/GBP tested the 0.85 big figure before a small intraday technical bounce occurred.
Czech Vice Governor Marek Mora openly indicated that he is moving closer to the camp of governors that are considering a 50 bps rate hike at the September 30 policy meeting. In an interview with Bloomberg he was quoted: ‘”The odds are now clearly between 25 and 50 basis points, possibly closer to 50,” “The urgency has certainly increased, although to vote for 50 basis points I’ll need our staff to justify this with more detailed data and we would need to explain it properly.” At the same time, he indicated that such a move could be seen as bringing forward necessary policy steps. “It’s possible the overall magnitude of tightening will be the same”. Today, the inflationary narrative was further illustrated by a higher than expected rise in August producer price inflation. PPI rose by 1.2% M/M and 9.3% Y/Y, the fastest pace since 1993! EUR/CZK touched a minor new correction low in the 25.25 area but currently again trades near 25.30.
China clearly objected a new Indo-Pacific security alliance that has been put in place between the US, Great Brittan and Australia. It argued that partnership shouldn’t target countries and that it might intensify the arms race in the region. Under the AUKUS agreement, the US and Brittan will give Australia support to deploy nuclear-powered submarines. With the initiative, the US and allies react to Chinese growing military presences in the region. In the UK Parliament, Prime Minster Johnson said that “Now that we have created AUKUS we expect to accelerate the development of other advanced defense systems including in cyber, artificial intelligence, quantum computing and undersea capabilities”. In the recent past, political tensions between Australia and China affected trade relations/flows between the two countries. So, it will be interesting to see whether this will also have consequences in this area.