There was a remarkable disconnect between US and European yields yesterday. The German curve further bear steepened with yields rising between 0.9bp (2y) and 3.8bp/3.5bp for the 5y/10-y sector. The US curve flattened. The US 2-y yield rose 2bp. 10’s and 30’s declined 3.5bp and 6.9bp respectively. The data were not to blame with both ZEW economic confidence and US NFIB small business confidence showing a loss of momentum. The curve moves are telling on markets assessment on the relative positioning of the Fed and the ECB with respect to the risk of more long-lasting inflation. The Fed/individual governors show ever more signs for preparing to front-load both tapering of bond purchases and raising interest rates as illustrated by comments from Bullard and Bostic yesterday. The latter even labeled ‘transitory’ as a ‘dirty word’ as inflation is lasting longer than expected. The combination of early tightening in a context of uncertainty on growth resulted in a flattening move. The 3-y and 10-y US auctions yesterday were solid/strong after recent price concessions. Markets’ attitude toward European bond clearly is different but telling at the same time. In September/October, the rise in European yields was mainly driven by higher inflation expectations, to a large extent inspired by the persistent ‘transitory narrative’ of the likes of ECB’s Lane. However, European real yields recently started a catch up move. The German 10-y real yield returned north of -2.0%. This remains extremely low, but suggests markets sense a modification of the ECB inflation language is on the horizon. US and major European equity indices mainly showed modest losses in a mild risk-off context. Oil stabilized at a high level (brent $83.5 p/b area). The risk-off combined with higher short-term USD yields continued to favour the dollar. DXY tested the 94.50/55 area. EUR/USD touched a minor new correction low (close 1.153). USD/JPY closed at 113.61, the highest level since November 2018.
Asian equities are trading mixed this morning. The dollar is losing a few ticks even US ST yields continue testing recent peaks (2-y 0.35%). Later today, the focus will be on the US CPI inflation data. A mild easing/stabilization near recent peak levels is expected (5.3% Y/Y for the headline, 4.0% core). Even in case of a slight overshoot, the market probably already concluded that the Fed will react anyway. Next question is whether this will translate in a further rise in ST US yields and a further rise of the dollar. The jury is still out. There is no reason to row against the tide, but quite some Fed action is already be discounted. We continue to monitor the DXY 94.50/75 area and the EUR/USD 1.1495 key support. In Belgium, we mention that the Flemish Community intends to launch a euro denominated benchmark fixed rate bond with a maturity of a 10-y.
The US has updated a proposal to the EU regarding a Trump-era dispute on steel tariffs. The new proposal still involves tariff-rate quotas (TRQs) but allows for a higher amount of steel quantities to be exported by the EU to the US before higher US duties kick in. Both parties are scrambling to find a solution for the dispute before December 1, when EU retaliatory tariffs to the original 25% steel and 10% aluminum US levies automatically kick in. However, the US starts from the assumption a TRQ-solution is acceptable while the EU says that’s illegal to begin with.
UK’s Brexitminister Frost in a much-anticipated speech yesterday said the Northern Ireland Protocol isn’t working and in fact is harming the region. He called for a replacement of the current version and stuck to his threat of using Article 16 – which suspends parts of the protocol – if necessary. Frost kept room for dialogue and a compromise though. His speech came on the eve of a EU counterproposal which the EU chief Brexit negotiator Sefcovic said is focused on specific adjustments rather than a complete overhaul. According to newspaper reports, those tweaks could result in removing more than half of the checks on goods arriving in NI from mainland UK. But it is believed this will fall well short of what Frost is actually demanding.
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