Markets
Core bond yields surged yesterday with USTs hugely underperforming German Bunds. Along with an improved equity sentiment (European stocks up to 1.7% higher and up to 1.25% in the US), strong US data and ever-increasing gas/oil prices were the main drivers. US ISM services confidence unexpectedly improved to 61.9 mainly as business activity picked up (62.3 from 60.1). Supplier deliveries remain at an elevated 68.8 (from 69.6). Gas prices went completely berserk, adding about 20% and pulling oil and the likes also higher to $82.56/b (Brent). The US yield curve bear steepened with the move accelerating in the first US trading hour. Changes varied from 0.7 bps (2y) to 5.2 bps (30y) exclusively on the back of inflation expectations. Regarding the latter, we reached an important milestone in the EMU where a gauge for long-term expectations hit the 2% mark for the first time since 2013. Real yields continue to decline however, reaching a new all-time low in Germany at -2.11%. The curve steepened up to 2.6 bps (10y). Despite a weakish dollar, EUR/USD struggled and finished back below 1.16. It only gained against the JPY (129.28) and the CHF (1.075) in the G10 landscape. Sterling enjoyed both from the risk climate and skyrocketing yields (>7 bps). EUR/GBP neared the 0.85 barrier.
Most Asian stocks fail to hold opening gains. South Korea underperforms (-2.3%). Core bonds extend their steep fall amid rising inflation concerns. US yields push another 4.6 bps higher at the long end of the curve. The 10y and 30y yield are both trading at the highest level since June. The euro is in good shape but the dollar is simply better: EUR/USD extends yesterday’s decline to 1.1587 currently. The kiwi dollar is no match even as the RBNZ hiked rates and is likely to do so another time in November (see headline below).
The “unofficial” US job report from ADP is due today. Markets expect a 430k job creation in September. Whatever its outcome, however, it’ll have to be extremely bad or even negative to alter expectations for the Fed to formally announce/start the tapering process in November. We see no compelling reasons for the move in core bonds to reverse soon with the energy crisis intensifying as the winter approaches. The technicals suggest the same with the US10y taking out 1.52% resistance and the German 10y -0.20%. US gas inventories are later published today and might add to investor worries should they shrink beyond expectations. We stay cautious on the euro. EUR/USD’s downside looks vulnerable with first support at 1.1495 still lurking.
News headlines
The Reserve Bank of New Zealand pulled the trigger on a first rate hike after a sudden outbreak of the Delta-variant prevented them to do so back in August. The MPC raised the policy rate from 0.25% to 0.50% and believes that it is appropriate to continue reducing the amount of monetary stimulus over time so as to maintain low inflation and support maximum sustainable employment. Markets discount another 25 bps hike at the November 24 meeting. The New Zealand economy in aggregate has been performing strongly despite the Auckland-lockdown. Headline CPI inflation is expected to increase above 4% in the near term before returning towards the 2%-midpoint over the medium term. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls. These immediate relative price shocks risk leading to more generalized price rises. The kiwi dollar slightly loses out against broad-based dollar strength this morning. NZD/USD declines from 0.696 to 0.692.
The Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications from 2.5% percentage points above the loan product rate to 3%. APRA took the action supported by the RBA (eg in yesterday’s monetary policy statement), the Treasury and the Australian Securities and Investments Commission. While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building. AUD/USD also follow the broader dollar move, dipping from AUD/USD 0.729 to 0.726.
