Last week ended with a sharp reversal of the heavy bond sell-off that originated from the UK earlier in the week. A well-filled economic calendar with PMIs from the eurozone (mixed) over the UK (solid) to the US (strong) came and went without a material market impact. The bond flattening move going into the weekend was instead again inspired by the UK. BoE chief economist Pill said the economy no longer requires the current exceptional monetary settings but pushed back against too aggressive market positioning. UK yields stumbled 4.8 bps (2y) to 8.1 bps (30y). UK markets still discount a 15 bps rate hike in November though. Fed chair Powell later voiced his standing views, saying it’s time to taper but not to raise rates. The US curve bull flattened with yields falling 2.5 bps at the short end (3y) to 6.9-7.9 bps at the long end (10-30y). Real yields were again the driver with the 10y real yield in the US closing at -1%. German yields with the exception of the 30y (-3.3 bps) closed virtually unchanged after erasing an earlier rise that brought eg. the 10y to the highest level since May 2019. Inflation expectations in all three areas soared to multiyear levels. Action on currency markets -” much as we’re used to these days -” was less enticing. EUR/USD whipsawed yet finished the day marginally higher at 1.1643. The yen excelled as (real) core bond yields slipped. USD/JPY eased further sub 114. The UK’s front-end outperformance vis-à-vis the EU and US hurt sterling. EUR/GBP jumped from support around 0.842 to 0.8465. Cable forfeited 1.38.
Asian equities trade mixed this morning. News headlines are centered around Turkish president Erdogan’s actions over the weekend (see below) that brings about a new all-time low for the lira. The yuan strengthens slightly vs. the USD even as the PBOC boosted its daily liquidity injection. USD/CNY stays below 6.40. The dollar in general is trading heavy though, beating only the Japanese yen. EUR/USD touched resistance around 1.1664 again. US yields edge up slightly. We assume that after Friday’s outsized move, some yield recovery might be on the table. That said it’s tricky to predict what investors are more focused at on a daily basis: growth or inflation? That’s even more so when you have a mainly backloaded eco calendar like this week with the ECB meeting and US growth & inflation numbers due on Thursday. Eurozone GDP & inflation is scheduled for release on Friday. It might be difficult for the euro in such circumstances to push through the above-mentioned first technical resistance. We do keep an eye at BoE’s Tenreyro speech on monetary policy this afternoon though. At the current stage, it’s not clear whether Bailey and Pill have the numbers for an actual rate liftoff as soon as November.
Turkish President Erdogan said that he ordered the foreign minister to declare ten western ambassadors persona non grata at once. The move marks a new low in international relations with Turkey. Erdogan wants to expel ambassadors from Germany, France, the Netherlands, Sweden, Norway, Denmark, Finland, Canada, the US and New Zealand following their joint statement last week calling for the release of jailed businessman and philanthropist Kavala. The latter has been behind bars for four years on accusations of wanting the overthrow the government. The European Court of Human Rights already ordered for Kavala’s release in 2019, blaming the Turkish government to silence its critics. The stand-out loser of Erdogan’s policy decisions is the Turkish lira. The currency sets a new all-time low near EUR/TRY 11.50 this morning.
Rating agency S&P raised the outlook on the Italian BBB rating to positive. With 80% of its adult population fully vaccinated, and the first tranche of an expected 10.8% of GDP in Recovery and Resilience Funds already disbursed, Italy is set to post a resounding economic recovery in 2021 and 2022, putting GDP above 2019 levels one year earlier than S&P had expected. For 2021, real GDP growth is set to recover by 6%, followed by 4.4% in 2022. Drivers of Italy’s buoyant growth include high vaccination rates, elevated private savings, improving business and household confidence, generous EU funds, and rebounding tourism. S&P could lift the BBB rating in case of an economic outperformance which puts the debt-to-GDP ratio on a steeper downward path.