Markets
US yields added 2.7 bps (30-yr) to 7.5 bps (5-yr) last Friday with the belly of the curve underperforming the wings. Strong(er than expected) September retail sales overshadowed small misses in October Empire Manufacturing business sentiment and October University of Michigan consumer confidence. The retail sales prompted the start of a sell-off which lasted into the US close. Spill-over effects to Europe pushed German yields 1 bp (2-yr) to 2.3 bps (30-yr) higher in a bear steepening move. The US dollar on Friday failed to really profit from the rising yield environment (evenly driven by inflation expectations and by real yields) even as the 2-yr yield rose to 0.40% for the first time since February 2020 with short term money markets already pricing a September 2022 first Fed rate hike. EUR/USD closed near unchanged at 1.1601. DXY at 93.94. The positive risk environment serves as a potential explanation. Main European and US indices recorded gains of close to 1%. Rising (real) yields and stocks obviously bite in JPY with USD/JPY moving above 114 to near the 2018 top (114.55) and November 2017 high (114.73) which are next resistance levels. EUR/JPY since early October surged from sub 129 to above 132. The tide is again changing in favour of the dollar this morning with short term dynamics suggesting an end to last week’s correction lower. EUR/GBP dropped out of the 0.8450/0.8721 trading band with BoE governor Bailey this weekend saying they will have to act on inflation. A December rate hike is discounted, but a surprise November move is no longer excluded.
Core bonds remain in sell-off mode this morning as you can’t look beyond the uncomfortably high inflation stories. Developments in New Zealand (see below) are a point in case. European pre-market activity even shows again pressure at the front end of the curve. The FT runs a story where four ECB governing council members said that they would support raising the current 10% cap on supranational bond buying under APP. This sort of flexibility enables the ECB to bypass potential problems with reaching the 33% cap on a national level. The fact that the EU will become a net €150bn/year issuer in 2022-2026 to fund NextGenerationEU comes in handy. The discussions evolve in a context where the ECB tries to sort out how QE-life will look like after ending PEPP in March 2022. The article also suggests discussions on including Greek bonds in future purchases even if they currently don’t meet the required credit rating bar. Finally, they suggest shifting from buying a fixed monthly amount of debt to targeting a total of overall purchases. The overall tone of the article shows willingness to do some subtle technical changes, but ECB governors clearly stop short of making strong commitments to really extend current ultra-accommodative measures. European money markets continue pulling forward first ECB rate hike bets towards end 2022/early 2023.
News headlines
Inflation in New Zealand sped up from 1.3% q/q to 2.2% in the third quarter this year, well above expectations of a 1.5% increase. At 4.9% y/y, prices now rise at the fastest pace in a decade. Soaring energy commodities were obviously a main driver, together with vegetable prices. Travel costs and the ongoing construction upswing were other important factors pushing inflation rates ever higher. This reading is likely to prompt the central bank of New Zealand (RBNZ) to tighten policy further at the meeting November 24. The RBNZ hiked policy rates for a first time in October while burying its bond-buying scheme already in July. Short-term rates (2y) in New Zealand surge 24 bps this morning to the highest level since early 2019. The kiwi dollar briefly surpassed 0.71 but soon failed the test.
Chinese growth slowed quite sharply in the third quarter: from 1.3% q/q to 0.2% vs 0.4% expected. Growth in 2021 so far amounts to 9.8% YTD y/y vs 12.7% in Q2 with all major categories retreating as shown by the monthly dataset for September. Property investment eased to pre-pandemic levels (8.8% YTD y/y) amid a property market crackdown by Beijing. Retail sales decelerated from 18.1% YTD y/y to 16.4%, as did industrial production (11.8%) and fixed investments (7.3%) with supply side demand especially weak due to the energy crunch that forced factories to curb production or even close completely. The Chinese yuan reacts pretty stoic, going nowhere around USD/CNY 6.43.
