Sat, Nov 27, 2021 @ 20:07 GMT
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Core Bond Markets Reversed Early


US stock markets set aside inflation worries on Friday even as both the core and headline PCE deflator accelerated to a 30-year high of 3.6% and 4.3% y/y respectively. Wall Street instead focused on a consensus-beating manufacturing ISM (61.1 from 59.9). Details were strong with new orders stable at 66.7, output coming in at 59.4 and employment rising again slightly (50.2) after a month in contraction territory. After easing for two months straight from historically high levels, prices paid picked up again (81.2 from 79.4). Late-stage trial results showing Merck’s Covid-19 pill cuts the risk of hospitalization or death by half supported sentiment as well. Equities in the US ended 0.8-1.4% higher. Democrats meanwhile are trying to get out of a deadlock that takes hostage of both the infrastructure and social spending plan (see below). Bi-partisan discussions on the US debt ceiling still haven’t resulted in a breakthrough either. Markets are getting more nervous with yields on US T-bills maturing past X-date (October 18) spiking. Despite a constructive environment and solid US data, yields on other tenors fell with the belly (-2.6 bps to -3.7 bps) outperforming the wings of the curve (-1.2 bps to -1.6 bps). German yields declined in lockstep with changes varying from -1.4 bps (2y) to -2.5 bps (5y/10y). The dollar lost further momentum after hitting important resistance at 94.74 in the trade-weighted variant the days before. DXY eased from 94.31 to 94.03. EUR/USD tried to recoup the 1.16. Sterling clawed back and almost completely reversed the heavy losses incurred on Wednesday’s risk-off. EUR/GBP finished at 0.856. Cable settles north of 1.35 again.

Asian sentiment was hit by the decision to suspend trading in Evergrande shares without a reason given. Reports later suggesting a rival company acquired a majority stake in the beleaguered property firm remain unconfirmed. Hong Kong and South Korean stocks underperform (-2%). Chinese markets are closed until Friday for the Golden Week. FX markets trade muted. The Australian dollar is leading G10 peers ahead of the RBA tomorrow. Core bond markets reversed early Asian strength to trade slightly below or near Friday’s closing levels.

Trading today is probably going to be technically inspired. The eco calendar heats up from tomorrow onwards with the US services ISM and Friday’s payrolls report as culmination point. In between we have several central bank meetings and a slew of ECB/Fed speeches. Core bond yields are looking for a bottom after last week’s repositioning. The 10y yield could find support around 1.45% in the US and -0.24% in Germany. We’re monitoring the very short end of the US curve (T-bills) closely as we expect the debt ceiling debate to intensify. EUR/USD started a bottoming out process as well but is struggling to take out the 1.16 big figure. It may need help from a generous risk climate to do so. Sterling awaits finance minister Sunak’s £500mln jobs plan.

News headlines

US Democrats have given themselves an additional month’s time to settle their difference on the spending agenda. House speaker Pelosi pulled the planned vote on the infrastructure bill a second time as Progressive Democrats still want it to be tied to the $3.5tn Build Back Better spending bill which includes childcare, paid leave, climate change and housing. Several progressive Democrats later said they are willing to compromise on the amount with the Capitol Hill whisper number being somewhere around $2tn. Moderate Democrats want assurances on that matter, before supporting any other spending bill (apart from the pulled infrastructure bill).

Czech central bank governor Rusnok rebuffed criticism from the country’s finance minister Schillerova who last week took a shot at the CNB’s unexpected 75 bps rate hike which increased the wedge between the CNB and other developing countries who for now retain easy policies which support wealth and living standards. Rusnok reminded Schillerova that the CNB’s sole legal mandate is safeguarding price stability. He suggested that other countries would follow swiftly. The CNB took a head start as it wants to stop higher inflation from boosting wage demands and that way become entrenched in the economy for longer. EUR/CZK continues trading near key support at 25.30.


KBC Bank
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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