The Aussie dollar is slightly weaker on dovish RBA meeting minutes

Markets

Core bonds slid coming out of the weekend yesterday during a quiet trading session. Risk sentiment was alright, volatility again low. European equities printed minor gains. Tech in the US outperformed, with smart money sending the S&P500 and Nasdaq to a new all-time (closing) high in the final hour. Treasuries underperformed German Bunds, suggesting some nervousness among UST bulls ahead of Wednesday’s Fed policy meeting. Yields rose 1.1bps to 2.4 bps at the short end (up to three years) while advancing between 4.3-4.6 bps at tenors starting from 5 years. The 10y managed a close above first resistance around 1.47%. The US yield rise also inspired German/European rates. The German curve bear steepened with changes varying from 1 bp for the 2y to 2.3 bps for the 10y. The latter tested but finished just south of the -0.25% resistance. Peripheral spreads widened 1 bp, the exception being Greece (-1 bp). Greece’s 5y yield briefly turned negative for the first time ever yesterday, leaving Italy the only euro zone member with a positive 5y yield. Most G10 currencies traded within a -0.5/+0.5% range. The yen underperformed; USD/JPY capped 110. EUR/USD recovered a small piece of Friday’s losses to finish at 1.212. A return back north of 0.86 in EUR/GP failed even as PM Boris Johnson, as expected, postponed a full return to normal with a month, citing uncertainty on the spread of the Indian virus variant.

China returns from a long weekend with a little hangover. Stocks at some point lost 1.7% before paring losses to about 1%. Some refer to the PBOC rolling over medium term loans without injecting additional cash into the system for the Chinese underperformance. Other markets trade with gains up to 1%. FX markets trade muted. The Aussie dollar is slightly weaker on dovish RBA meeting minutes. Core bonds inch higher.

US PPI (May), June Empire Manufacturing and May retail sales are all scheduled for release at the same time today. They provide final insights for the Fed on building (factory) price pressures and the US consumer state of affairs ahead of their policy meeting. However, the (poor?) retail sales print might still be distorted by the March surge, when stimulus payments were spent. It’ll take a sizeable surprise though to trigger a market reaction worth mentioning with the crucial Fed meeting looming. The US (and German) yield decline bottomed on Monday and this trend could simply continue today in low gear. EUR/USD, similarly, found support on the lower bound of the downward trend channel around 1.21. We still keep a close eye at the downside in the short run, in particular if the Fed indeed turns a little less dovish. UK labour data just came in decent with strong wage pressures and a solid job creation. The unemployment rate fell to 4.7%. Sterling is going nowhere sub 0.86.

News headlines

The EU and the US are stepping up efforts to reach a deal on the dispute over aircraft subsidies, the FT reported. A breakthrough might be announced today after two days of intensive talks between EU and US officials. The EU and the US are holding a summit in Brussels today. A solution to the conflict would not only remove uncertainty with respect to the aircraft sector, it would also remove the risk of other goods being hit by retaliation tariffs. The current suspension in transatlantic tariffs comes to an end by July 11.

According to the NY’s Fed May survey of consumer expectations, median one-year-ahead inflation expectations increased by 0.6 percentage points in May, to 4.0%, the seventh consecutive monthly increase and a new series high. Median inflation expectations at the three-year horizon increased from 3.1% to 3.6%, the second-highest level in this series. Median year-ahead home price change expectations increased by 0.7 percentage point to 6.2%, substantially above the 2020 average of 2.3% and marking a third consecutive month. Mean unemployment expectations - or the probability that U.S. unemployment will be higher one year from now - decreased to a low of 31.9% in May, from 34.6% in April.

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