The hawk is back. Bank of England member Saunders swapped his hawkish label for a dovish one end of 2019 when Brexit uncertainty was hurting sentiment and the economy. He stayed on the dovish side throughout the pandemic. Until today. Commenting on the economy and (yesterday’s stronger-than-expected) inflation, Saunders said that with inflation seen above target for two to three years, it may be appropriate to withdraw stimulus soon, in “the next month or two”. The labor market slack is shrinking, he noted, adding that guidance conditions for tightening policy are now met. Saunders’ comments follow deputy governor Ramsden’s yesterday. Although their views are not shared by a majority of the MPC yet – governor Bailey for example remained more neutral in an interview – it does suggest a general shift in thinking is underway. The pound thinks so too and strengthens. EUR/GBP went back to test the 0.853 support which is the final hurdle before the April 2021 low (0.8472) pops up. It’s still hesitant to really push through. Markets don’t want to be wrongfooted with the August 5 policy meeting, which just turned into a crucial one after all, looming on the horizon. The risk-off climate (stocks slip more than 1% in Europe) is capping sterling’s momentum as well, which can be seen in cable (GBP/USD) holding stable near 1.384 due to a generally solid dollar, despite a mixed bag of US data (see below). The trade-weighted index is nicely holding the upward sloping trend channel, bringing DXY to 92.6 today. EUR/USD retreats from intraday highs of around 1.185 back to the low 1.18 area. The yen is the only major currency able to make a fist. USD/JPY is flat at 110. The Swiss franc initially was well bid with EUR/CHF (currently 1.083) nearing 1.08 before the market decided it went far enough.
The all-too-familiar bull flattening trend continued in fixed income. If sentiment is constructive, markets assume a solid economic recovery with low inflation and ample monetary support to keep (long) rates low. Not even an increasingly assertive Bullard can change market’s thinking. The St Louis Fed governor said it is time to end “these emergency measures”, saying the economy has made the substantial progress needed. He wants to kick off the tapering though not on an automatic pilot and with respect for a still-uncertain environment. If the general climate worsens, like today, safe haven bids for core bonds generate the same effect on yields. US yield changes vary from -1.4 bp (5y) to -2.8 bps (30y). We’re keeping a close eye at the 134 level in the US Treasury 10y note which acted as resistance already quite a few times. The German yield curve bull flattens with declines of 1.4 bps (10y, just shy of support at -0.34%) to 2.4 bps (30y). Peripheral spreads widen slightly (+1 bp).
In its monthly report, OPEC expects global demand for crude oil to return to pre-pandemic levels in the second half of next year. In this scenario global oil demand will surpass the mark of 100 million per day in the third and the fourth quarter of 2022. According to OPEC, oil demand averaged 99.98 million bpd in 2019. However, it expects consumption to suffer a setback in the first quarter of next year, which might lead to surplus in the market at that time. An important part of the rise in demand is expected to be supplied by non-OPEC producers, including the US. Uncertainty on demand and on non-OPEC production probably explains Saudi-Arabia’s aim to maintain the OPEC+ production agreement beyond the April 2022 deadline.
US eco data printed mixed today. The July Empire Manufacturing index surged from 17.4 to 43, the highest level on record (vs 18 expected). Details showed surging new order and shipments while price indicators remained sky high as well. A measure of hiring reached a record as well. The July Philly Fed Business Outlook declined from 30.7 to 21.9 (vs 28 forecast). Details showed that the setback was broad-based from price indicators over employment to orders and the outlook. Weekly jobless claims set a minor new cycle low at 360k (vs 350k consensus). Import (1% M/M & 11.2% Y/Y) and export prices (1.2% M/M & 16.8% Y/Y) showed similar price pressures as CPI and PPI numbers earlier this week. June industrial production rose by 0.4% M/M.