Markets
Democratic infighting on US President Biden’s massive fiscal stimulus agenda hurt risk sentiment and ended the positive correlation between stocks and bonds. At stake is yesterday’s delayed vote on the infrastructure agenda. Moderate Democrats want shovels in the ground ASAP and move on to discuss the huge $3.5tn social proposal in a next phase. Progressive Democrats want to tie both votes as they fear attempts to significantly water down the $3.5tn number once the infrastructure deal is up and running. The unwelcome outcome is that none of the spending plans makes any headway as discussions become stretched. Democrats additionally face the stand-off with Republicans over raising or suspending the debt ceiling by October 18. On both occasions, they aren’t really scoring points with next year’s mid-term elections already in mind. In any case, markets treated the fiscal mess in a textbook way. US stock markets lost up to 1.6% for the Dow Jones. The S&P 500 closed at the weakest level since mid-July, just holding above the mid-September sell-off low. The technical picture suggests that the correction lower has further to go. Core bonds ended with a late rally as less fiscal stimulus means a less stringent need to normalize monetary policy as at least one potential inflation booster fades away. US yields lost 1.4 bps to 3.3 bps in a daily perspective with the belly of the curve outperforming the wings. Details effectively showed real rates were responsible for the move. German Bunds underperformed US Treasuries as most of the action occurred after the European closing bell. German yields still recorded gains of up to 2.5 bps with national inflation prints (Germany, Spain & France) suggesting upward risks to today’s EMU number (3.3% Y/Y headline & 1.9% Y/Y core expected).
With stocks and bonds no longer selling-off in lockstep, the Japanese yen managed to restore its safe haven status vs other majors. USD/JPY arrived at key resistance near 112.23/40 (2019 & 2020 tops) yesterday morning before returning almost 1 big figure to currently trade near 111.20. The trade-weighted dollar lost momentum as well, treading water ahead of the key resistance zone which stretches from 94.47 (38% retracement on 2020 USD decline) to 94.74 (November 2020 top). The single currency still lacks the leverage to fight back with EUR/USD giving away the 1.16 big figure to close at 1.1580. Still, dwindling global dollar momentum could also slow the slide in EUR/USD. Apart from EMU CPI data, US PCE deflators and manufacturing ISM are scheduled for the release. Yesterday’s intraday dynamics suggest at least a short term return of the classic risk correlation between bonds and equities.
News headlines
OPEC+ is considering whether it should raise production more than has been agreed in July when it meets next week. The current agreement plans 400 000/day in November and December. The rumours followed after a meeting of the OPEC Joint Technical Committee that sees an oil supply deficit this year and sees a slightly smaller than expected surplus next year. No details on concrete volumes and dates have been provided. Even so, at $78/b Brent oil currently trades off the post-corona peak levels north of $80/b registered earlier this week.
The Czech government is voicing ever more objections on the hiking cycle of the Czech National bank after it unexpectedly raised the policy rate by 0.75% to 1.50% yesterday. Czech Finance Minister Alena Schillerova said the CNB is raising interest rates on corporate loans and mortgages while central bankers of developed countries continue to support wealth and living standards. There are general elections scheduled in the Czech Republic next week. The CNB justified yesterday’s decision as the unexpected acceleration in inflation is not only due to a rise in external prices, but mainly due to a further unexpectedly strong rise in core inflation, including owner-occupied housing and prices in the services sector. A further increase in electricity and natural gas prices might add to inflationary pressures later this year. The CNB sees significant upside risks to its inflation outlook, especially for the next few quarters. The autumn forecast available at next policy meeting will be key to guide the pace of further tightening.
