A new day, a new sell-off on core bond markets. This week showed that the Summer lull is definitely over. Four Fed members dotted the i’s and crossed the t’s yesterday. Current market positioning goes against Fed guidance. Don’t fight the Fed, they said… The US central bank will push forward with its aggressive tightening cycle and doesn’t intend to blink on first economic strains. Rate cuts in 2023 are definitely not on the table.
We’ve witnessed a similar hawkish stance, stressing the need to frontload tightening in order not having to step it up later, in this week’s central bank meetings in New Zealand and Norway. Meanwhile, UK inflation hit double digits and hasn’t reached its peak yet.
Even Japanese core inflation this morning showed an acceleration away from the 2% inflation target (2.4% Y/Y) to the highest level since end 2015. Who’d figured that even BoJ Kuroda would one day face difficulties defending his ultra-easy monetary policy?
In any case, the Fed is talking and the market is listening again. Especially with Fed Chair Powell yesterday being confirmed as key speaker at next week’s Jackson Hole Symposium. “Reassessing constraints on the economy and policy” is this year’s general topic, but Powell will just zoom in on the economic (and probably monetary) outlook.
US yields today rise by 5.7 bps (2-yr) to 7.5 bps (30-yr). The US 10-yr yield is close to touching the 3% mark for the first time since mid-July. European bonds continue their underperformance, having outperformed in the mid-June, end-July recovery. The ECB has quite some catching-up to do with German ECB member Schnabel yesterday suggesting willingness and readiness to do so.
This morning’s German July producer prices also showed a record jump: 5.3% M/M and 37.2% Y/Y (from 32.7% Y/Y), suggesting that price pressure will remain elevated over the next months. German yields rise by 8.3 bps (2-yr) to 11.3 bps (10-yr). The EU 10y swap rate sits back above 2% for the first time since July 21 (inaugural ECB rate hike). Greek and Italian 10-yr yield spreads widen by 6 bps. UK yields add 9.2 bps (2-yr) to 12.8 bps (30-yr).
It’s the first time this week that the longer end of the curve underperforms the front end. Details show both inflation expectations, but especially real yields being responsible for the move.
Stock markets as a consequence suffer a second beating this week. Their Summer rally is over as core bonds turn back in sell-off mode. Main European indices lose around 0.75% with US gauges opening up to 1% softer (Nasdaq).
The dollar is getting its momentum back. EUR/USD yesterday lost 1.01 and changes hands near 1.0050 today. A new attack of parity is in the making. The July YTD low stands at 0.9952.
A hawkish Fed, a more difficult risk climate and potentially weak EMU PMI’s all point in the direction of a lower EUR/USD rate. The trade-weighted dollar reaches 108 with the YTD high at 109.29. Higher core bond yields weigh on the yen as well. USD/JPY is also marching forward to the 139.39 YTD high.
The euro ranks second amongst majors with a technical break in EUR/GBP accelerating the increase in the pair. EUR/GBP breaks out of the corrective downward trend channel in place since mid-June, taking out 0.85.
This morning’s Gfk consumer confidence (weakest since start of the series in 1974) painted an extremely grim picture for UK households. Cable (GBP/USD) is a whisker away from the 1.176 YTD low.News Headlines: Average Polish wage growth exceeded CPI in July. Wages rose by 3.4% M/M and by 15.8% Y/Y, compared to an inflation reading of 15.6% Y/Y. Details showed that especially state-owned mines and power utilities granted heft salary boosts to their employees. The mining industry for example wanted to mitigate the risks of strikes with a monthly wage increase of 26%! The National Bank of Poland slowed its tightening cycle early July (+50 bps to 6.5%), suggesting limited additional scope to extend the normalization cycle. Money markets currently discount a 7.25% cycle peak around the turn of the year.