The strong UK labour market report for September with elements that bode well for the month October as well defined European morning trading. This job market resilience is the final missing piece for the BoE to kick off the tightening cycle. The pound strengthened towards the EUR/GBP 2021 lows to finish at 0.8429. UK’s yield curve bear flattened with changes varying from 4.2 bps (2y, 5y) to 1.7 bps (30y). US retail sales came in much stronger than expected and took over from the UK labour report as the dominant trading theme in the afternoon. US (real) yields rose 1.3 bps (5y) to 3.6 bps (20y). Hawkish comments from St. Louis Fed Bullard underpinned the UST selloff. He argued to end the tapering faster (in Q1) to have the optionality to hike rates sooner. He also put on the table to start the balance sheet runoff (i.e. not to reinvest proceeds from maturing bonds) immediately after the tapering process instead of waiting a while. Bond yields in Europe in the meantime fell with the German curve bull steepening, seeing the 2y and 5y decline by 4.1 bps and 3.7 bps respectively. The German 10y real yield hit a new alltime low at -2.238%. UST underperformance gave the dollar a clear edge over peers. EUR/USD closed at 1.132, down from 1.137. USD/JPY surpassed recent highs to finish at the highest level since early 2017 (114.82).
Asian equity markets trade generally softer despite the green ending on WS yesterday. The USD grabs the opportunity to extend its winning streak with the DXY testing 96 for the first time since July 2020. EUR/USD hit important support at 1.129 but prevents a break lower for the time being. Core bonds start sideways in a session stripped of important news.
There’s an avalanche of speakers scheduled for today that servers as a wildcard for trading since they’ll probably contain conflicting views. We’d warn against fighting the current dollar trend. EUR/USD finds itself in a precarious situation. EUR/USD 1.129 has to hold to prevent a return to 1.1163 (March 2020 interim high, June 2020 correction low) followed by 1.10 (76.4% retracement from the March 2020-January 2021 EUR/USD uptrend). The constant pushbacks by ECB officials (eg. Rehn this morning) on policy normalization by stressing the temporary nature of inflation obviously are no help for the euro or European yields either. That’s different for the pound, where early investors just received another rude awakening by above-consensus UK CPI. Headline inflation sprinted from 3.1% to 4.1% y/y and core measures coming in at 3.4%, strengthening the BoE’s tightening case even further. Sterling gets a boost. EUR/GBP 0.84 is under attack. A sustained break paves the way towards the 2020 lows of 0.8282.
US Treasury Secretary Yellen updated House Speaker Pelosi on the Treasury Department’s ability to continue to finance the operations of the federal government under constraints of the debt limit. After the small October increase of the latter, Yellen projected that funds would run dry by December 3. She now refined that projection, indicating that the Treasury would be left with insufficient remaining resources to finance the US government beyond December 15. To ensure the full faith and credit of the US, Yellen stresses that it is critical that Congress raise or suspend the debt limit as soon as possible.
Australian wage growth increased by 0.6% Q/Q in Q3 with annual growth coming in at 2.2% Y/Y. That remains below the 3% something threshold put forward by Reserve Bank of Australia governor Lowe as a condition to sustainably lift inflation back in the 2-3% target band. Private (0.6% Q/Q) and public (0.5% Q/Q) sector wage growth was more or less similar with real wages falling by 0.2% Q/Q and 0.8% Y/Y. The Aussie dollar this morning loses out against an overall stronger US dollar with AUD/USD trading below 0.73 for the first time since early October.