Core bond markets reversed early
U.S. equity markets put inflation worries aside on Friday even as PCE’s main deflator and main deflator accelerated to a 30-year high of 3.6% and 4.3% in year-on-year respectively. Wall Street instead focused on a manufacturing ISM that beats the consensus (61.1 against 59.9). Details were solid with new orders stable at 66.7, production at 59.4 and employment edging up (50.2) after a month in contractionary territory. After relaxing for two consecutive months from historically high levels, prices paid recovered again (81.2 vs. 79.4). Late-stage trial results show that Merck’s Covid-19 pill also cuts the risk of hospitalization or death by half. US stocks ended up 0.8 to 1.4%. Democrats, meanwhile, are trying to break a deadlock that holds both the infrastructure and social spending plan hostage (see below). Biparty talks over the US debt ceiling have yet to come to fruition either. Markets are getting more and more nervous with the surge in yields on US Treasuries maturing after date X (October 18). Despite a constructive environment and solid US data, the returns of the other tenors fell with the belly (-2.6 bps to -3.7 bps) outperforming the wings of the curve (-1.2 bps to -1.6 bps). German rates fell in parallel with variations ranging from -1.4 bps (2 years) to -2.5 bps (5 years / 10 years). The dollar lost further momentum after hitting significant resistance at 94.74 in the trade-weighted variant the previous days. DXY went from 94.31 to 94.03. EUR / USD attempted to recover the 1.16. The British pound recovered and almost completely wiped out the heavy losses suffered in Wednesday’s risk halt. EUR / GBP ended at 0.856. The cable settles again north of 1.35.
Asian sentiment was hit by the decision to suspend trading in Evergrande shares for no reason. Reports later suggesting that a rival company acquired a controlling stake in the besieged real estate company remains unconfirmed. Hong Kong and South Korea stocks underperformed (-2%). Chinese markets are closed until Friday for Golden Week. The forex markets are trading muted. The Australian dollar leads the G10 peers ahead of the RBA tomorrow. Core bond markets reversed early Asian strength to trade slightly below or near Friday’s close levels.
Today’s trading is likely to be technically inspired. The ecological calendar is heating up from tomorrow with the US services ISM and Friday’s wage report as the highlight. In between, we have several central bank meetings and a multitude of ECB / Fed speeches. Core bond yields are looking to bottom after last week’s repositioning. The 10-year rate could find support around 1.45% in the United States and -0.24% in Germany. We are watching closely the very short end of the US curve (Treasuries) as we expect the debt ceiling debate to intensify. EUR / USD has also started a bottoming process but is struggling to break out the big 1.16 figure. He may need the help of a generous risk climate to do so. Sterling is awaiting the £ 500million employment plan from Finance Minister Sunak.
US Democrats have given themselves an extra month to settle their dispute over the spending agenda. House Speaker Pelosi withdrew the planned vote on the infrastructure bill a second time because Progressive Democrats still want it tied to the $ 3.5 billion Build spending bill Back Better which includes child care, paid time off, climate change and housing. Several Progressive Democrats later said they were prepared to compromise on the amount, with the whispered Capitol Hill number hovering around $ 2 billion. Moderate Democrats want assurances on this, before supporting any other spending bills (aside from the withdrawn infrastructure bill).
Czech central bank governor Rusnok rebuffed criticism from the country’s Finance Minister Schillerova, who last week criticized CNB’s unexpected 75bp rate hike, which widened the wedge between CNB and the other developing countries which for the moment maintain easy policies which support wealth and standard of living. . Rusnok reminded Schillerova that the CNB’s only legal mandate is to preserve price stability. He suggested other countries would follow suit quickly. The CNB has got a head start because it wants to prevent higher inflation from stimulating wage demands and thus anchoring itself longer in the economy. EUR / CZK continues to trade near key support at 25.30.