And they all went down together again… Core bonds suffered more losses yesterday as investors grab the faintest of reasons to ditch German Bunds, US Treasuries and UK Gilts these days. The sell-off started around noon in the UK and spilled into US dealings. Data from the Confederation of British Industry (CBI) -” genuinely not a market-mover -” showed (input) price pressure remaining near the highest level since 1977 while selling prices rose by the highest amount since 1980. On top of, price pressure is expected to remain sky-high over the next three months. BoE Bailey’s warning to act on inflation still echoed through markets and kick-started the new down leg. A batch of US eco data added to the move with weekly jobless claims falling to a post-pandemic low (290k). (US) investors and the Fed see improvement on the labor market as the final cue to go ahead with (and accelerate in 2022?) policy normalization. The UK yield curve bear steepened with yields adding 2.8 bps (2-yr) to 5.7 bps (30-yr). Daily US yield changes varied between +1.3 bps (30-yr) and +8 bps (3-yr) in a bear flattening move. German yield changes ranged between -1.9 bps (30-yr) and +4.2 bps (5-yr) with the belly of the curve outperforming the wings. Inflation expectations rather than real yields remain responsible for the lion share of the yield increase which helps explain why 10-yr yield spreads vs Germany remain unaffected for now.
BoE chief economist Huw Pill’s maiden interview was published after market closure. He seems to back Bailey by saying that the November meeting is a “live” one. UK inflation can peak slightly above 5% early next year while the previous inflation prognosis (August Monetary Policy Report) are around 1 ppt lower. “That’s a very uncomfortable place to be for a central bank with an inflation target of 2%”. Pill did push back against too aggressive market expectations further out. He suggests that the economy does no longer needs the extraordinary support received during the pandemic, specifically referring to the 0.75% BoE policy rate in early 2020. He added that the BoE doesn’t see the need to go to a restrictive policy stance given the transitory nature of inflation in the base case. In an interesting spin, he pleads in favor of ditching forward guidance on interest rates. Such guidance always starts “pretty well with good intentions, but then always end in some confusion”. We don’t see an immediate market reaction in FX space during Asian hours to the interview with EUR/GBP changing hands at the lower end of the extremely narrow 0.8420/0.8460 trading range in place this week.
Most Asian stock markets are trading positive in the wake of the S&P’s all-time high. Chinese state media report that Evergrande repaid a missed interest payment (Sep 23) on a USD bond. The grace period would have ended this weekend and triggered a formal default. Today’s eco calendar contains EMU/UK PMI’s. Consensus expects a small setback in headline numbers, but details will be crucial. Momentum on bond markets is negative. With regard to the euro, we expect it to return more into the defensive ahead of next week’s ECB meeting. Failure to move above EUR/USD 1.1664 in the wake of the PMI’s would solidify this resistance and bring the focus back towards 1.1495/93.
The US reached an agreement with the UK, France, Italy, Austria and Spain on a digital services tax (DST). The agreement covers the interim period until an agreement within the framework of the OECD global tax reform is reached, which is expected end 2023. In the current agreement, “DST liabilities that US companies accrue during the interim period will be creditable against future income taxes accrued under Pillar 1 under the OECD agreement”. At the same time, the US agreed to drop the threat of trade tariffs against the five European countries that had already a digital service tax in place against major US tech companies.
The Reserve bank of Australia today for the first time in eight months intervened in the bond market to defend its 0.1% target for the April 2024 government bond under its YCC regime. The RBA bought A$ 1 bln, bringing the yield back to 0.12% from 0.17%. The RBA apparently wanted to take action as markets drifted away from its forward guidance that it is unlikely to raise the policy rate before 2024.