US yields are still marginally higher and so is the dollar

Markets

It took markets an overnight sleep to realize that the Fed on Wednesday set out the framework for a new era in monetary policy. European yield markets showed some hesitation as EMU PMI’s printed softer than expected. Growth activity is over its peak momentum (composite index eased from 59.0 to 56.1). Supply bottlenecks are further complicating the post-corona rebound, but this also applies to sharp price rises. Bond market bears took control as US traders joined the fray. The Bank of England policy statement only reinforced the idea that policy normalization might come sooner rather than later. UK economic growth recently lost some momentum and the labour market remains a source of uncertainty. Still, accelerating prices made Bailey an Co conclude that some developments since the August meeting strengthened the case for some modest tightening over the policy horizon. Combined with a further risk rebound on global equity markets, this provided the trigger for an impressive broad based bear steepening move. US yields jumped between 2.5 bps (2-y) and 13 bps (10 and 30 y) mainly driven by a rise in real yields. The 1.37% resistance for the 10-y yield, which looked far out of reach post-Fed, was simply blown away (currently 1.44%).The German curve showed a similar, albeit more modest steepening trend with yields rising between 2 bps (2-y) and 6.6 bps (10-y). For now, intra-EMU government yields were little affected. US equities still closed with solid gains (about 1.0%/1.5%), but the rally lost momentum as the bond sell-off accelerated. The dollar throughout the session lost its post-Fed gain (DXY close 93.08). EUR/USD rebounded even as interest rate differentials widened in favour of the dollar (EUR/USD close 1.1739). The yen was the main victim on higher real yields and a global risk-on. USD/JPY extended its rebound north of 110 (110.33 close ). EUR/JPY jumped sharply after recent tests of the 128 support area (close 129.5). Sterling outperformed as markets see an ever growing chance of a BoE rate hike in Q1 next year. After a test of the 0.8610/15 resistance, EUR/GBP returned back in the established 0.8450/0.8615 range (close 0.8556).

Asian equities showed a mixed picture this morning as next steps in the Evergrande saga remain uncertain. Japanese equities outperform (weaker yen). Japanese August inflation data (0.0% Y/Y core ex-fresh food) were close to expectations. US yields are still marginally higher and so is the dollar. The eco calendar is thin today. German IFO business climate remains interesting but will probably confirm the trends visible in the PMI’s. Key question is whether the repositioning in the bond markets continues. We think it can. Next technical reference in the US 10-y yield near 1.45%1.47% (50% retr/previous lows) is already within reach. For the German 10-y yield -0.15% is a next reference. European bond and FX markets for sure will keep a close eye on the German elections. An outcome that would open the door for more fiscal support might propel European yields and the euro. EUR/USD at least took some further distance from the 1.1664 support area.

News headlines

House Speaker Nancy Pelosi said that Democrats are ready to pass a stopgap spending bill without a debt ceiling increase to avert a government shutdown at the start of next month. The current proposal which passed Democraticled House on Tuesday includes suspending the debt limit until December 16 2022. Republicans vowed to block it in the split Senate though where 60 out of 100 votes are needed. By passing a so-called continuing resolution, they allow time to find a deal on the debt limit which is expected to be hit by the end of October. The US risks default without agreement.

The IMF said in its concluding statement of the 2021 Article IV discussions that Australia should employ macroprudential measures to address incipient risks stemming from surging house prices which raise concerns about affordability and financial stability. Potential action includes increasing interest serviceability buffers and instituting portfolio restrictions on debt-to-income and loan-to-value ratios.

Download The Full Sunrise Market Commentary