Markets
The US 10y real yield hit the August all-time low of -1.2%. Since last week’s Fed and BoE meetings, the gauge – proxy for future growth, but these days especially monetary policy expectations – shed around 16 bps. US inflation expectations over that same time span added some 10 bps. Similar dynamics are at play in Europe. The German 10-yr real yield declined from -1.94% to -2.21% while inflation expectations rose from 1.77% to 1.91%. Markets are sending a clear signal to G3 central banks: postponing policy normalization risks an un-anchoring of inflation expectations while simultaneously putting future growth at stake. Stock markets initially thrived on the central bank delay with all three US indices recording all-time highs on a daily basis. The EuroStoxx50 set a new recovery high. The rally on Monday already arrived in thin air. The Fed’s financial stability report and the continuous decline of real yields convinced investors to nevertheless take some chips off the table. Main US benchmarks dropped around 0.6% yesterday, but short-term technical pictures suggest that the move could be prolonged. The combination of dropping real yields and rising inflation expectations helps explain the dollar’s difficulties to extend overall gains. EUR/USD is going nowhere between 1.1550 and 1.16 while the trade-weighted greenback failed to take out 94.47/74 resistance. USD/JPY lost 113.23 support.
The intraday rise of US Treasuries yesterday ended after the $39bn 10-yr Note auction. Contrary to secondary market action, investors for a second day straight snubbed primary sales. The auction stopped through the 1 PM bid side with a below average bid cover. We expect a similar outcome at today’s 30-yr Bond sale which could cap the bond rally. Today’s other highlights are inflation numbers. Chinese ones are already out (see below) and point to… ever rising price pressures for consumers and especially producers. US CPI inflation is expected to accelerate to 5.9% Y/Y for the headline reading and to 4.3% Y/Y for the core measure. We look out whether (higher) inflation expectations will start outweighing the setback in (real) yields which would help a stabilization in nominal terms. In FX space, it is unlikely to boost the dollar. A fragile risk environment could be more supportive for the greenback. Sterling for now remains rather immune to hawkish brexit rhetoric (see below), but event risk is clearly building. In such context, it will be difficult for sterling to start a near-term comeback. EUR/GBP currently changes hands around 0.8550. First resistance stands just below the 0.86 big figure.
News headlines
Both Chinese firms and consumers again had to cope with higher prices in October. Factory gate price inflation (PPI) accelerated a faster than expected 13.5% (from 10.7% in September), the fastest pace in 26 years. According to comments from the National Bureau of Statistics, the rise in producer prices was mainly due to imported inflation, tight domestic supply of energy and raw materials. The mining industry recorded prices rises of 66.5% Y/Y. Raw materials were 25.7% higher compared to the same month last year. The rise in costs risks squeezing profits in large parts of the Chinese industry. Even so CPI consumer prices also accelerated a faster than expected 1.5% Y/Y up from 0.7% in September. The rising in consumer inflation was both due to a bigger rise in non-food prices (+2.4% Y/Y) and a slower decline in food prices (-2.4% Y/Y versus -5.2%) in September. Rising inflation complicates potential action from the PBOC to support growth or address the consequences of stress in the real estate sector.
Irish Deputy Prime Minster Varadkar yesterday joined other recent comments that the EU and Ireland should prepare contingency plans in case London would suspend some parts of the Northern Ireland Protocol. According to Varadkar, the EU will have no option but to take retaliatory measures if the UK takes unilateral action. This EU retaliation potentially includes ending the post-Brexit Trade and Cooperation agreement. UK Brexit minister David Frost and EU Commissioner Maros Sefcovic will have a key meeting on Friday this week.
