Markets
The rebound on core bond markets accelerated yesterday. End last week/earlier this week the September/October rally (in yields) already shifted into a lower gear as investors reassessed whether (some) central bankers will address current inflation with pre-emptive rate hikes in order to avoid more aggressive action later. Recent speeches of BoE Bailey and Pill gave markets the impression of the Bank of England being one of the proponents of this approach. However, the BoE defied market trust and left its policy rate unchanged, with Bailey and Pill joining the majority for an unchanged decision. The BoE not delivering was the perfect trigger for markets to further unwind bearish bond positions, also in interest rate markets outside the UK. US yields declined between 4.15 bps (2-y) and 7.75 bps (5 & 10y), mainly due to a further decline in real yields. German yields eased up to 8.3 bps (5-y). Peripheral bonds thrived with the Italian10-y spread narrowing another 6 bps. The move also caused some damage on the technical charts with the 10-y EMU swap falling below the 0.17%/0.20 % support. Moves in FX again were much more modest than in interest rate markets. Sterling evidently took a hit. Cable lost almost two big figures to close at 1.35. EUR/GBP returned in the previous trading range (close 0.856). The yen profited from the decline in core yields (USD/JPY close 113.76), but the dollar outperformed most other majors with EUR/USD closing at 1.1554. Equity indices in Europe and the US mostly recorded gains of about 0.5%, but there was no euphoria.
Asian markets fail to capitalize on yesterday’s gains in the US and Europe. USD maintains yesterday’s gains (EUR/USD 1.1555 area) as do core bonds. Later today, the US payrolls take center stage. At the press conference, chair Powell turned the focus from inflation to the labour market. Reaching maximum employment remains key for the Fed to start hiking rates. August and September payrolls disappointed, partially due to some statistical issues. For today’s October report, markets anticipate job growth to have accelerated from 194k to 450k. The unemployment rate might drop from 4.8% to 4.7%. However, Powell stressed the Fed will assess the full employment goal by a broad series of indicators. In the respect, wage growth and a recovery in the participation rate are important too. After recent decline in yields, markets already unwound part of their bets on a pre-emptive CB action. Still, a disappointing report could extend the recent repositioning. For the US 10-y yield, 1.50% is providing intermediate support, with 1.45% the line in the sand to prevent a real weakening of the technical picture. A better-than-expected report might halt the bond rally, but it will take time from markets to regain faith in more aggressive CB action on inflation. EUR/USD stays in the defensive, but intraday moves were limited of late. Will the payrolls be strong enough to force a test of the 1.1495 support? Sterling traders might look out for comments/explanations from BoE MPC members after being wrongfooted by recent BoE guidance. Even so, investors probably won’t be in a hurry to react to any new hints on imminent rate hikes, if they were to reoccur. The downside in EUR/GBP is again better protected.
News headlines
Portugal will hold early elections on January 30, the country’s president announced yesterday. The decision follows parliament rejecting prime minister Costa’s minority Socialist government’s 2022 budget last week. The hard left, who withdrew support for Costa’s minority government after the 2019 elections, said the budget was too focused on spending controls. But having the third-highest debt ratio in the euro area, the PM is determined to ensure sound public finances. Costa is headed for the elections with a lead over the biggest opposition group, the center-right PSD.
The Japanese government will spend about 2tn yen on cash payments to households with children under 18 in spring next year, the Yomiuri newspaper reported today. The plan is part of an economic stimulus proposal that seeks to cushion the impact of the pandemic and is hoped to get passed parliament by the end of this year. Entitled household would receive 100 000 yen per child regardless of income. PM Kishida is also mulling handouts to low-income households and temporary workers. The government would tap its reserves to fund the plan rather than issue new debt.
