US Treasuries continued underperforming German Bunds at the start of the new trading week. US yields added 0.8 bps (2-yr) to 4.3 bps (7-yr) with the belly of the curve underperforming the wings. The US 5-yr yield trades north of 1% for the first time since March 2020. The US 10-yr yield takes out the psychological 1.5% barrier with the next real test arriving soon at 1.53% (62% retracement on March/July decline). Although a plea of heavyweight Fed governors confirmed that tapering is coming (very) soon, it were (higher) inflation expectations that were responsible for the lion share of yesterday’s move. Take a quick look at oil prices and wonder no longer. Brent crude tops $80/barrel for the first time since October 2018. Global commodity price indices like CRB are even stretching to highest levels since mid-2015. The broad-based rally, combination of pent-up demand but also and especially continuing supply-side issues significantly raises upward inflation & downward growth risks. Other factors causing US Treasuries’ underperformance are this week’s end-of-month refinancing operation and the political battle over lifting the US debt ceiling. The US Treasury yesterday sold $65bn 2-yr Notes and $61bn 5-yr Notes. The 2-yr sale stopped above the cut-off bid side with a below-average bid cover in a sign that the repositioning at the front end of the curve has further to go. The 5-yr Note auction went average. The Treasury wraps up today with a $62bn 7-yr Note deal. The US Senate blocked the Democratic-led bill to suspend the debt ceiling into December 2022 in a vote largely among party lines. The bill thus didn’t get the 60 votes needed in the split Senate (50-50). Republicans don’t want to be accountable for President Biden’s trillion dollar spending agenda and force Democrats to go alone on the debt ceiling issue via the reconciliation process. Agreeing on short term funding to keep the government running is no issue, as long as it is separated from raising the debt limit. The US dollar profited from the rising yield differential (despite the inflation driver), forcing EUR/USD below 1.17 again. A weaker euro played as well as the German parliamentary election shut the door on the possibility of (short term) additional fiscal spending. Key EUR/USD 1.1664 support remained out reach though going into this week’s ECB forum on central banking. One day – perhaps sooner rather than later – the single currency will get the normalization boost as well. EUR/GBP drifted lower in the 0.85 big figure with a marginal touch of sterling strength as well after BoE-governor Bailey floated the option of lifting policy rates already this year (from 0.1% to 0.25%). Today’s eco calendar contains US trade balance, consumer confidence, and Richmond Fed manufacturing index. We don’t expect them to interfere with current trading dynamics (higher bond yields; USD to test resistance levels). Speeches by central bankers are a wildcard.
The Czech government approved a 2022 central budget bill that would entail deficit of CZK 376,6 bln, only slightly lower than the shortfall of about CZK 400 bln that is expected for this year. The Finance Ministry expects a budget deficit of 5% for 2022. The Budget was only approved by the Ministers of the ANO party. The Social democrats didn’t agree as they asked a bigger rise in public sector wages. The Government of Prime Minister Babis this year also ran an expansionary fiscal policy that received remarks from the central bank. Babis argued that the fiscal expansion was allowed as the country still runs a low public debt. The Finance Ministry expects public debt to rise to 46.2% next year from 43.5% this year. The proposal will have to be brought to Parliament after the October 8-9 election. So, it remains unsure whether the ANO party of PM Babis will have a government majority at that time.
Profit growth at China’s industrial companies decreased further in to 10.1% in August from 16.4% in July, indicating growing headwinds for the world’s second largest economy. The statistics bureau commented that ‘”A sustained and stable recovery in corporate profits is facing more challenges,” “The epidemic is still spreading in some areas, overall prices of bulk commodities are high, the cost of international logistics is elevated, and the shortage of chips is pushing up corporate costs.” Still, for the first eight months of this year, profits rose 49.5%, easing from 57.3 YTD growth over the first seven months of the year.