Calm returned to commodity markets yesterday after a hectic Wednesday. Natural gas prices along with electricity plummeted after Norwegian and Russian supply to Europe more or less normalized again. The decline in commodity prices immediately supported the USD even as European risk sentiment turned for the better. Stronger-than-expected August US retail sales later in the session gave the dollar another edge over G10 peers. EUR/USD tanked below 1.18 to close at 1.1767. USD/JPY jumped from 109.38 to 109.73. Cable slipped from 1.384 to below 1.38. Sterling had a good run against the euro initially, enjoying the good labour report and strong inflation earlier this week along with the good mood on markets. EUR/GBP was headed to 0.85 before technical trading kicked in and sold on the uptick. The pair closed at 0.853. The US data, including an unexpected rise of the Philly Fed outlook, also supported yields going into next week’s FOMC meeting. The US curve bear steepened with the belly underperforming wings. Changes varied from 0.9 bps (2y) over 4.4 bps (5y) to 2.5 bps (30y). The 10y yield (+3.9 bps) bounced off support by the upward sloping trendline. German bond yields initially rose in sympathy with the US but didn’t maintain gains. The Bund future did have a minislump after the cash market closed in the wake of a Financial Times report suggesting an ECB rate hike might come sooner than most expect (see below). The bund recovers part of the losses in Asian trading currently. The US counterpart treads water. Stocks in the (far) east trade mixed. The PBOC injected short-term cash to help Evergrande fears. The Chinese yuan stays resilient within the narrow sideways trading range that’s been developing since June. The Japanese yen is sold across the board. EUR/USD holds near yesterday’s close.
Consumer sentiment by the University of Michigan is due today. Consensus expects a moderate increase from 70.3 to 72 in September after the sudden, steep drop in August. We see some small risks for an upward surprise as last month’s drop may have been exaggerated (as suggested by the retail sales for example). If anything, it strengthens the case for the Fed to announce tapering next week. We expect both US bond yields as well as the dollar to hold strong ahead of Sept 22. First resistance for the 10y yield comes in at 1.37%. EUR/USD 1.1752 support was tested yesterday and remains the first reference for today, followed by 1.1704 in case of a break lower. In the UK’s economy final update, August retail sales this morning disappointed strongly. Last month’s reading was revised downwardly on top. Damage for sterling remains limited (EUR/GBP 0.853) but it is early in European trading still. PMI confidence next week come in at the eleventh hour (literally and figuratively) for the Bank of England.
According to the Financial Times, ECB Chief Economist Philip Lane in private discussion with German economist on the ECB’s LT inflation projections indicated that inflation might reach the 2% soon after the end of its three year forecast horizon. The ECB last week in its published forecasts saw inflation at 2.2% this year, 1.7% in 2022 and 1.5% in 2023. Inflation reaching the target earlier than expected could change the scenario for the ECB to start raising rates. However, in a reaction the ECB said “Mr Lane didn’t say in any conversation with analysts that the euro area will reach 2% inflation soon after the end of the ECB’s projection horizon.” The ECB also said that the conclusion of the FT that a lift-off of interest rates could already come in 2023 is not consistent with its forward guidance.
In a question-and-answer session at the Czech parliament, Czech Prime Minister Babis on Thursday questioned the current rate hikes of the Czech national Bank. The Prime Minister suggested that current inflation (e.g. higher oil prices) is out of control of the government (and maybe also of the central bank). He indicated that it would be appropriate for the central bank not to raise interest rates, because that would not help at all and it would only hurt the people and companies via higher borrowing costs. He also indicated that inflation was expected to slow down. Recent comments within the CNB suggested that the recent acceleration in inflation is making some governors considering stepping up the pace of rate hikes from 25bps to 50bps, maybe already at the Sept 30 meeting.