(KBC Market Research Desk – KBC Bank)
The initial core bond yield jump quickly faded once again. Intraday advances of as much as 7 bps (in Germany) evaporated as the day evolved on a combination of factors. News of the first overseas grain shipment from a Ukraine port since the Russian invasion weighed on price of a range of (soft) commodities. Second, the Liberty Times reported that House Speaker Pelosi is to visit Taiwan during her Asian visit after all. China repeatedly warned not to. Geopolitical tensions flared, supporting the safe haven bid for core bonds. Finally, two elements strike us from the July US manufacturing ISM yesterday. While the headline series came in at a better-than-expected 52.8 (down from 53), new orders eased to 48 (49 expected). Furthermore, prices paid, considered an early inflation gauge, stumbled more than 18 points to the lowest in almost two years. Both fueled ongoing market speculation that the Fed may not need to be as aggressive as it(s dot plot) suggests. The damage check reads -1.4 bps (2y) to -10.9 bps (20y) for US Treasuries. Bund yields lost 1.5 bps (2y) to 4.1 bps (30y). Stock markets whipsawed to close slightly lower in Europe and the US. The yen scores a hattrick on currency markets, being the outperformer for a third day straight while the dollar continues to trade on the back foot. USD/JPY dropped to 131.6, down from 133.3. EUR/JPY closed at the 135 support level. EUR/USD tested the 1.028 intermediate resistance but closed at 1.026 eventually. Sterling remains in a sweet spot ahead of the (more aggressive?) BoE. EUR/GBP edged south to 0.8375 though finished off intraday lows.
Geopolitical tensions between the US and China with Taiwan in the middle holds markets in a grip in Asian dealings. Stocks drop with China underperforming strongly (losses of more than 3.5%). The yuan drops to USD/CNY 6.77. Safe havens benefit, including US Treasuries (yields down >2 bps across the curve) and, you guessed it, the Japanese yen. USD/JPY loses important support at 131.25 and EUR/JPY the 135 level. We think the Taiwan story will only be a temporary market determinant, but the cautious risk mood is apparent nonetheless and may last until Pelosi’s planned meet with the president of Taiwan on Wednesday, especially given the thin eco calendar. Interestingly, the dollar isn’t really able to bank on its safe haven status. Let’s see if the 105 level in the trade-weighted (DXY) index holds today. EUR/USD briefly pushed trough 1.028 this morning only to pare gains afterwards. Momentum in the pair over the past three days was not bad. But in case of a break beyond 1.028, 1.035 already pops up as the first, actual resistance. That may be a tough nut to crack with the upper bound of the downward trend channel also looming. Additionally, it remains unnatural for the euro to rise in risk-off. We keep a close eye on rates. Both in the US and EU they are at or near yet another technical crossroad (eg. 10y swap 1.63%, German 10y 0.73%, US 10y 2.55%).
Inflation in South Korea quickened in line with expectations. Headline price pressures in July advanced by 0.5% m/m to be up 6.3% y/y vs. 6% the month before. Core inflation (ex. agriculturals and oils) rose from 4.4% to 4.5%. The OECD measure (ex food and energy) stabilized at 3.9%. Accelerating price developments keep up the pressure on the BoK to continue its tightening cycle. It said after the publication that inflation may continue to stay above 6% for some time to come. BoK governor Rhee Chang-yong the day before said another hike by 25 bps is likely on August 25. He didn’t rule out a bigger-sized move. In July, the BoK raised rates by 50 bps to 2.25%.
The Reserve Bank of Australia hiked policy rates to 1.85% from 1.35%. It’s the third consecutive 50 bps hike and it follows stubbornly high inflation that’s the result of both global and domestic factors. Inflation is seen peaking later this year and should average around 7.75% in 2022, a little above 4% next year and around 3% in 2024. Growth will still expand strongly this year at 3.25%, aided by record high terms of trade, before moderating to 1.75% in the two following years. The RBA expects more tightening in coming months, but added in the August statement that it is not on a pre-set path. Markets saw this as a hint that jumbo rate hikes may no longer be appropriate. Australian swap markets trimmed expectations for the next policy meeting in September from 50 bps to 25 bps. The terminal rate was adjusted lower only marginally (between 3.25 and 3.50% still). The Aussie dollar is disappointed. AUD/USD loses the 0.70 barrier again.
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