14.08.2013, Time of writing: 03:30 GMT The Big Picture Bond market rout leaves USD higher: With commodity prices rising, it should be no surprise that bond yields followed. Yields across the world moved higher yesterday, ranging from less than 2 bps in Spain to 14 bps in the UK. US Treasury 10-year yields rose by around 10 bps. The rise in US yields may have been sparked by the robust US retail sales figures (more due to the upward revision to the previous data than to any surprise in the latest figure), which made tapering more likely; it wasn’t driven by inflation expectations, which have been virtually unchanged for a week now. That means higher US real yields are likely to support the dollar going forward, in my view. Gilts were the worst-performing of the major global bond markets even though the UK annual inflation rate edged down in July. This may be because people are starting to think that the Bank of England doesn’t actually plan on keeping inflation under control; the five-year breakeven rate for the UK widened by 5 bps yesterday. So although sterling was Iittle changed against the dollar and even a bit stronger vs EUR, we still remain bearish on the currency. It will be a big day for sterling today as we get the minutes of the recent Monetary Policy Committee (MPC) meeting, which decided the “forward guidance” that the Bank recently launched. It will be interesting to read how so many intelligent people could reach a decision that had the exact opposite effect to what they were hoping for. Also we get the unemployment data for June, which now becomes a key indicator as the MPC has made changing its monetary policy conditional on unemployment falling to 7.0%. You needn’t start worrying yet; it’s forecast to stay unchanged at 7.8%. USD/JPY managed to gain even though the Nikkei was lower (usually USD/JPY moves in tandem with the Nikkei) and JGBs were the only major bond market to rally (albeit by only 1 bps). It appears that the Bank of Japan is being successful in holding the line on bond yields (10 year yields down 8 bps over the last month) despite the improving economy and gradually rising inflation expectations (up 21 bps over the last month). Falling bond yields + rising inflation expectations = lower real yields = higher USD/JPY. This may well be one of the aims of Japan’s quantitative easing. In the Eurozone, it’s GDP day! This time it should be better than last time, when a slew of negative numbers simply confirmed everyone’s worst fears about the Eurozone. Economists are not expecting any great surge this time, but at least +0.2% is on the right side of zero, and with French GDP far exceeding expectations (at +0.5% qoq, beating even the highest estimate on the street) and Germany also a bit better than expected, the overall figure should be pretty good too. There have been many good figures out of the Eurozone recently. Yesterday’s ZEW survey was well above expectations and although EU industrial production for June fell short a little bit of what people expected, nonetheless it did grow, as opposed to the decline in May. The improved Eurozone outlook and the concomitant rise in Bund yields may counter the improved US outlook to some degree and keep EUR/USD in its recent trading range.
Posted on: Thu, 15 Aug 2013 04:50:06 +0000
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