Markets
Core bonds lose ground with Bunds underperforming USTs. European PMIs beat consensus with both manufacturing and services rising to 58.6 and 56.6 respectively, the first increase in several months. The headline series thus advanced from 54.2 to 55.8. However, the upbeat readings come with the usual warning of supply delays leading to still-strong and even record-high price pressures, reinforced by energy price spikes. Combined with the renewed threat of lockdowns, optimism about future output sank to the lowest since January. The German yield curve bear steepens nevertheless with nice gains mounting up to 6 bps (10y), driven by real yields. ECB’s Schnabel and Knot struck a similar tone like Villeroy’s yesterday, both downplaying the impact from possible new Covid restrictions on the economy and thus on monetary policy. Schnabel also said the ECB shouldn’t pre-commit over a too long timespan and that risks to inflation are tilted to the upside. Dutch governor Knot later told Bloomberg that any APP adjustments after PEPP ends in March 2022 should be possible in either direction. It follows Villeroy saying boosting APP is possible but not a necessity. ECB officials are clearly preparing markets going into the crucial December meeting. US bond yields’ rise is more evenly distributed with 2-3 bps increases across the curve. Here too real yields are driving the upleg. The euro is in a slightly better shape than yesterday but it remains unconvincing, especially against the USD. Front-end rate support for the dollar might be counterbalancing Bund’s underperformance at the long end. EUR/USD barely recovers from yesterday’s hit. At 1.125 the pair isn’t even trying to recoup previously lost support at 1.129. The yen is pretty resilient given that it’s real yields in action today. USD/JPY is attacking the previous cycle highs just below 115, EUR/JPY inches higher north of 129. A fragile (but admittedly improving) equity sentiment probably limits the damage for the Japanese currency.
There was some central bank talk also in the UK. MPC member Haskel said he’s concerned about second-round effects of inflation and that rates would have to rise if the jobs market remains tight. While stressing he first wants more evidence on the latter, it does mean something coming from one of the most dovish MPC members. His comments prompted an acceleration of the bear steepening trend that was already in place. UK Gilt yields rise 4-5 bps from the 2y tenor to the 10y. Unlike yesterday, it’s not enough to counter the minor risk-off setting for the pound though. EUR/GPB rises north of 0.84 again, the fifth day of flipflopping around that big figure.
News Headlines
The US will release 50 mln barrels of crude oil from its strategic reserve in an effort to reduce prices for consumers, the WH announced. The release is part of a coordinated action with other major oil consumers, including Japan, China, India, South Korea and the UK. The release will add to market supply from mid-to-late December. 32 mln of the supply are part of an exchange. 18 mln will take the form of an earlier release of a sale that was already decided before. India also committed to release 5 mln of its strategic reserves. The impact on oil prices was modest after prices already lost substantial ground of late. WTI ($76.5) trades off the intraday lows. Brent even gains a bit ($79.75). OPEC+ already warned that it would slow its production rises in case of additional supply from stocks.
Retail sales in Poland at current prices in October rose at 14.4% Y/Y, a faster pace than expected. Real sales (constant prices ) also rose a solid 3.6% M/M and 6.9% Y/Y up from (-2.4% M/M and 5.1% Y/Y in September). October construction output also printed at a stronger than expected 4.2% Y/Y. However, strong October eco data again didn’t help the zloty. A sharp rise in Covid cases might slow activity in the near future as new containment measure might be considered. The zloty also suffers from low real yields as markets doubt recent NBP hikes will be enough to arrest inflation while at the same time core yields in the US and Europe are rising again. The zloty today touched a 12-year low against the euro trading at around EUR/PLN 4.74 (currently 4.72).
