Major bond markets may have entered a period of consolidation, perhaps correction


Headline/core inflation in the US for April came in at 8.3%/6.2% yesterday, defying expectations of a bigger decline from 40-year highs. Core inflation has also shown more signs of widening and is increasingly persistent. It was no surprise to read both the markets and the expected Fed, fueling fears of an aggressive tightening cycle that could choke the economy.

US equities initially clung to the fact that inflation had nevertheless fallen, but that proved too weak an argument in a bullish selling market. The Nasdaq underperformed again (-3.18%). US bond yields climbed 12 basis points shortly after the CPI release to end with +2.6 basis points ahead. Yields at longer maturities even turned red, losing almost 8 basis points at the very long end. The 10-year has lost the 3% mark.

European/German yields initially joined the US move higher, but here too things quickly reversed. German Bund yields fell 3.1 basis points, European swap yields more than doubled. It came even as the ECB’s Lagarde finally relented and hinted at a rate hike in July.

In this regard, the performance of EUR/USD was disappointing. Overall risk aversion even pushed the pair slightly lower to 1.0512. The trade-weighted dollar index continues to knock on gate 104. The pound was long a sea of ​​calm yesterday, but came under pressure as US stocks began to fall. EUR/GBP moved from 0.855 to 0.858. GBP/USD closed at 1.225, the lowest level since May 2020. Asian equities are down 1-3% this morning on lingering inflation concerns. Market news is limited. US bond yields extend their recent correction by 1.2 to 4.4 basis points. Hong Kong intervened in its currency (see below). The Japanese yen is outperforming. USD/JPY drops below 130. EUR/USD fills offers in the 1.05 low area. The US PPI and jobless claims on today’s ecological calendar are worth mentioning, but we don’t expect them to influence the markets. Yesterday’s movements in the major bond markets suggest that we may have entered a period of consolidation, correction perhaps, where growth concerns take precedence over the tightening/inflation rhetoric. The first support for the US 10-year is at 2.83%, but the crucial support is around 2.72%. The German 10yr loses the 1% support with the next benchmark around 0.80% (2018 high).

If uncertainty over the ecological outlook does indeed become the dominant theme, it will be difficult for EUR/USD to escape the gravitational pull of 1.05. Sterling extends yesterday’s losses after GDP growth in Q1 is below expectations at 0.8% q/q while the cost of living crisis does not suggest any improvement for the coming quarters. UK Finance Minister Sunak would bring more relief in August, but it could be too little too late. EUR/GBP breaks above the 0.86 resistance (November/December 2021 corrective highs).

News headlines

The Hong Kong Monetary Authority (HKMA) intervened in the currency market to prevent the HK dollar from weakening beyond the authorized trading range between 7.75 and 7.85 USD/HKD. HKMA bought HKD 1.586 billion. The peg of the Hong Kong dollar with the US dollar is under pressure from rising US yields/interest differential between US and Hong Kong money market rates. The interventions aim to drain local market liquidity to raise local money market rates. It was the first time since early 2019 that HKMA had to intervene in the forex market to support the local currency. In October 2020, he intervened for the last time to prevent the HKD from strengthening outside the authorized link. USD/HKD is still trading around 7.85. According to an article in the Financial Times, Turkish authorities are increasing pressure on the local bank to prevent corporate clients from buying foreign currency against the Turkish lira to avoid a further weakening of the local currency. According to the article, banks must seek central bank approval for larger currency purchases. Since the start of the year, the Turkish lira has traded relatively stable, although the combination of high inflation (69.97% year-on-year in April) and a low key rate (14%) leaves the currency with a deeply negative real interest rate. However, in the previous days, the lira again showed tentative signs of weakening EUR/TRY standing at 16.23, compared to levels around 15.53 EUR/TRY at the end of last month.

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