Interest rate markets again experience a roller-coaster ride this week as investors pondered conflicting economic developments and a highly uncertainty central bank reaction function. On Monday, investors’ faith in pre-emptive CB action (Bailey comments) caused an impressive flattening of the yield curve. Yesterday, inflation fears likewise justified a re-steeping move. Today, the pendulum again moved to the other side. US yields are ceding 1-2 bps with the 5y outperforming (-2.25 bps).The German curve shows a similar move with yield declines ranging from 1 bp (30y), over 2 bps (10y and 2y) to 3 bps (5-y). As was the case yesterday, there was again little in the way of economic story to ‘explain’ the price action. The dominant headline on, especially European markets, was Jens Weidmann’s announcement to depart as Chief of the German Bundesbank (also see infra). In a letter to the Bundesbank staff, Weidman stressed the importance of a stability oriented monetary policy that the BuBa is representing. Reading in between the lines, the ECB ever more drifting away from its ‘narrow’ mandate apparently became source of growing discomfort for the Buba president and a reason to finish his term only 2 years after he was reappointed for a 8-year term. Weidmann joins the ever growing list of compatriots (Axel Weber, Juergen Stark, Sabine Lautenschlaeger….) leaving the ECB or the Buba on disagreement with ECB’s shift to a more unconventional policy. We didn’t see much direct impact of Weidmann’s announcement on (interest rate) markets. After yesterday’s risk rebound, equity markets took a breather as investors try to assess how individual companies reporting results cope with rising prices and supply shortages. Oil also eases off recent peak levels with Brent currently trading near $83.25/b.
The dollar remains in the defensive even as moves are limited. The trade-weighted index is still testing the 93.70 area. USD/JPY in an early spike almost touched the June 2017 top (114.73), but the attack didn’t succeed with the pair currently again trading in the 114.25 area. EUR/USD is holding a tentative upward bias (1.1640 area) but a sustained break of 1.1664 resistance remains a step too far. Sterling initially touched a soft patch as UK October inflation printed marginally softer than expected (3.1% headline from 3.2%). UK yields decline up to 5 bps for shorter maturities. EUR/GBP tried to regain the 0.8450 level, but move lacked any strong momentum (EUR/GBP 0.8445).
Buba chief Jens Weidmann is resigning. He will step down at the end of the year thus emptying his seat at the ECB’s board of governors too. Weidmann has been chairing the Bundesbank for a decade and was (one of) the most hawkish member(s) in the ECB board, sometimes openly criticizing the ultra-easy monetary policy. His resignation comes ahead of a crucial ECB meeting in December – which he’ll still attend – when the central bank is due to decide on the course of PEPP (or an alternative bond buying scheme) after the March 2022 shelf date. The range of possible successors is wide, spanning from the Buba’s deputy governor Buch to its chief economist Ulbrich over member of the ECB’s Executive Board Schabel or an external economist. Weidmann’s successor in any case is likely to be less of an inflation hawk.
Canadian inflation came in at 0.2% m/m in September, a tad faster than the 0.1% consensus. This brings the yearly measure on a higher-than-expected 4.4%, up from 4.1% in August. That’s the fastest pace since 2003. The average of core gauges rose to 2.67% from 2.6% last month. The Bank of Canada, like many other central banks, is of the view that most of the current inflation spike is transitory though keeps a close eye at its persistence and magnitude. The central bank meets next Wednesday with consensus expecting the BoC to cut QE’s pace down to C$1bn per week. On rate hikes, it long said it will probably not raise policy rates before 2H22. Markets beg to differ: the recent repositioning has also affected BoC expectations with money markets discounting a first full rate hike early Q2 2022. USD/CAD recently slipped sub 1.24 and is staying there after today’s CPI release.