Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: Sentiment boost on retreating yields, Xi-Biden phone call.
John J. Hardy
Chief Macro Strategist
Summary: The euro is flattish after an indifferent ECB that unfolded largely as expected, while the US dollar has rolled over the weak side overnight and into this morning on falling Treasury yields and the risk sentiment boost from a long phone call between Presidents Xi and Biden. Today the focus switches to US PPI and whether the action and closing levels today tilt us away from so far inconclusive action this week.
FX Trading focus: ECB a snoozer, Xi-Biden dialog boosts CNH
The ECB was about as in-line with expectations as possible, as the central bank delivered a “dovish taper” that was rather pre-announced already, given that Lagarde and company had announced that the pace of asset purchases would be “front-loaded” earlier this year. At the same time, the bank announced that it sought to maintain flexibility in the rate of purchases, theoretically allowing it to expand purchases again early next year if deemed necessary. There were a couple of small adjustments to the forecasts, with the GDP estimate for this year raised to 5.0% from 4.7% and the inflation forecast raised for this year through 2023 (to 1.5% ). That last adjustment is too small to indicate any concern that current high inflation levels will prove stickier than anticipated. The meeting was essentially a punt to the December meeting, which will have to see the bank rolling out a plan for how it will wind down the emergency QE after March of next year and transfer some percentage of that to the standard asset purchase plan to avoid a cliff edge. A new German government will likely loom large as well.
Finally, the ECB probably wanted to buy a bit more time before indicating taper plans to see how the first couple of months of fall and early winter shape up before taking next steps. EU sovereign bonds rallied on the meeting, and were helped on that account by a strong rally in US treasuries that extended yesterday in the wake of another strong US treasury auction, this time of 30-year T-bonds. All in all, the ECB meeting is a relative non-factor that keeps the euro rather neutral to weak in the crosses if we keep a strong “risk on” backdrop, although the single currency could certainly rise versus a weak US dollar if we are set for an extension of this very quiet, complacent market and US yields remain low (see next week’s important US data points below). The 1.1800 and 1.1909 levels are the next ones of note for EURUSD traders.
Xi-Biden talks boost risk sentiment and CNH. Late yesterday, Chinese President Xi and US President had a long phone call, one apparently initiated by Biden as he sought to re-energize the dialogue between the two countries after lower level talks went nowhere earlier this year.
Chart: EURCNH
While USDCNH is far and away the most traded CNH pair, the CNH has a tendency to trade as a “low beta USD” in the crosses, though there was a period earlier this year when the CNH showed more isolated strength. On that note, it is worth not only tracking USDCNH here after the move overnight that is taking it close to range lows, but also EURCNH and other CNH crosses for signs that the renminbi is moving on its own, especially if the huge area a bit lower in EURCNH shown on the chart below gives way without notable EURUSD weakness, for example.
EU-Poland showdown to get more focus? The National Bank of Poland meeting on Wednesday was a disappointment for those looking for signals pointing to imminent rate hikes, as President Glapinski made it clear that all ducks would need to be in a row before the bank will look at hiking rates: a strong economy, rising wages and persistent inflation. But another issue has cropped up this week that could well affect the zloty’s outlook: a commissioner from the European Court of Justice saying in an interview that Poland should be fined for its lack of compliance with EU rules on independence of the judiciary and that it was logical for the EU to withhold the EUR 36 billion in EU recovery funds allotted to the country until the situation is sufficiently addressed.
EURNOK heavy after Norway Aug. CPI print today – short Norwegian rates are at their highs for the cycle in the wake of the August CPI data out of Norway this morning, taking EURNOK back lower and toward the August lows of just below 10.20. The core, “underlying” CPI actually came in below expectations at -0.6% month-on-month and only +1.0% year-on-year, while the headline year-on-year number rose to 3.4% vs. 3.2% expected and 3.0% in July. An election is set for Monday, with the future of the country’s oil and gas industry the most contentious policy discussion and the less industry-friendly left-leaning parties expected to be able to put together a weak coalition as they appear set to boot the conservatives from power.
US data today and next week. The data calendar for the US heats up today and next week with four data points of interest: today’s August PPI, which is expected to show the highest core print for the “final demand” PPI ex Food and Energy for the cycle at 6.6%. By way of comparison, this measure barely cracked 3.0% year-on-year back in 2011 when oil accelerated beyond 100 dollars per barrel. Next week, the focus will be on the August CPI number on Tuesday, August Retail Sales number on Thursday and the preliminary University of Michigan sentiment number for September on Friday.
Watch guidance today from the Russian Central Bank as it is set to hike 50 basis points this morning, the latest in an impressive series of hikes that have helped keep the ruble stable and even firm versus the US dollar in recent months as Governor Nabiullina seeks to keep the rate above inflation. The USDRUB exchange rate is near a local tipping point lower, just below 73.00, though the bigger level is down just below 72.00. For the latter to fall, oil prices may need to break higher still, although another breakthrough for Russia would be the green light from German regulators allowing natural gas sales via the just completed Nord Stream 2 pipeline.
Table: FX Board of G10 and CNH trend evolution and strength
Most trend readings are as inconclusive as ever, though the strong NZD continues to stick out, as does the strong NOK – let’s see if CAD stops underperforming on today’s Canadian jobs report.
Table: FX Board Trend Scoreboard for individual pairs
Watching USDCAD here as it is stuck in a range limbo, needing sub-1.2500 for the CAD bulls to take charge again. Also, interesting to see EURGBP tilting quite sharply lower, joining GBPUSD in showing sterling on the bid again.
Upcoming Economic Calendar Highlights (all times GMT)
- 1030 – Russia Central Bank Rate Announcement
- 1230 – Canada Aug. Employment Data
- 1230 – US Aug. PPI
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