PBOC RRR silenced rumors and the resulting risk aversion were the main drivers yesterday, totally eclipsing the announcement of the ECB’s strategy review. Shares fell more than 2% in Europe as lingering concerns about growth peaked. US stocks lost more than 1.5% early in the session, but an intraday rally ultimately capped losses to less than 1%. We have also seen a similar trend in core bond yields. The long tenors initially fell from 4 (Germany) to 6 (US) bps just to cut losses as some calm returned. The US bull curve steepened as markets more anticipated Fed rate hikes, pushing yields 2.1bp to 3.7bp lower in the 2yr-5yr segment. The decline in the 10-year and the 30-year eased with losses of ‘only’ 2.3 bps and 1.1 bps and was, unlike the previous one, driven by failing inflation expectations. The German curve completely reversed an initial bullish flattening and ended up unchanged. The euro rocked two horrible days and excelled with safe havens including the yen and Swiss franc. This happened even before the panic in the bond markets subsided. EUR / USD rebounded south of 1.18 to close at 1.1845. The USD / JPY slipped below 110. The strength of the Euro and minor weakness in the British Pound propelled EUR / GBP from June’s 0.855 support area to but below 0.86.

Core bond yields are holding up fairly well in Asian transactions after more or less stabilizing yesterday. US rates rebound nearly 4bp, confirming (for now) the hammer candlestick painted on technical charts yesterday. Equity sentiment remains fragile, however, with most indices in the red. SK is underperforming after imposing stricter corona measures. The other news is limited to the Chinese inflation figures (see below). The dollar is strengthening a bit, the yen is lagging behind.

In the absence of a meaningful economic calendar, general sentiment will once again be in control. We need to watch our words, but it looks like the total panic and aggressive bond repositioning from the start of the week may ease. We will look for the start of a hollow. The first resistance is at 1.35% for the 10-year US and -0.3019% followed by -0.287% for the German variant. While the EUR / USD decline remains technically fragile, we assume that the overall easing of market tensions will provide at least some protection, if not more. This week’s low at 1.1782 must hold anyway to cancel the immediate downside warning. The feuds between the UK and the EU never end, it seems. Previously it was the NI protocol, now it is the money the UK would pay to the EU in relation to commitments made while still a member state. The two had an agreement on the so-called divorce bill, although the EU suggested the amount owed had increased. At the moment, the British pound doesn’t really care and the issue is unlikely to break the EUR / GBP deadlock either. The pair remains trapped in an extended bearish channel.

News headlines

The National Bank of Poland kept its key rate unchanged at 0.1%. The NBP will continue to buy government securities. The policy statement was similar to that of last month. Annual inflation is likely to remain above the upper band of deviations from the inflation target (2.5% +/- 1.0%) over the coming months. However, a significant part of this increase is considered temporary and due to factors beyond the control of monetary policy. At the same time, growth and inflation projections were revised upwards from March. Growth for the years 2021/23 is close to 5%. While keeping an optimistic tone on growth, the NBP still mentions that the pace of the recovery will depend on the future development of the zloty. Interventions remain a political option. The NBP has not given any hints on policy normalization, but given high inflation and strong growth, conditions may change. The next forecast is available at the November policy meeting. The zloty weakened to EUR / PLN 4.55 yesterday, but this was mainly due to overall risk aversion.

Chinese price data released this morning showed an attempt to dampen inflationary momentum. June producer prices fell from 8.8% to 9.0% in May, as policies to secure supply and stabilize commodity prices began to take effect. Consumer price inflation slowed from 1.3% to 1.1%. Food prices contributed to the decline. Non-food prices and fuel prices fueled inflationary pressures. Core inflation was 0.9% yoy (unchanged from May) and shows limited pass-through effects from producer price to end users.


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