Core Bonds Trade Sideways | Action Forex

Markets

Focus was on in the United States yesterday, with a series of key gauges released. My retail sales were disappointing (although after an upward revised April) while (core) factory gate inflation accelerated to a series high (6.6% a / j headline, 5.3% core). Empire State’s manufacturing index declined more than expected to 17.4. The mixed stock market has made it difficult to draw firm conclusions about what it means for Fed policy. US (technology) stocks slipped. U.S. yields rose a few bps during the day only to return to initial levels after the data. German groups did not succeed with yields ending with 1.2 bps (5y) to 1.9 bps (10y) higher. Commodities, especially metals including copper, iron and aluminum, tanked in some cases more than 4%. Rumors (which were confirmed today) have spread, China is aiming to hit its state reserves to accelerate its campaign to control rising raw material prices. The dollar did not pick sides. EUR / USD explored both the south and the north, but ended up flat. Sterling ignored a solid work report. EUR / GBP closed close to 0.861.

Asia-Pacific stock exchanges are trading mixed. Investors are clearly expecting Fed benchmarks later today. China is less effective, losing more than 1%. Japanese data export / import was slightly disappointed in May, but is within a margin of error. FX markets trade quietly. AUD and NZD take the lead in G10. The USD is going nowhere. Core bonds trade sideways.

Fed day. The June policy meeting comes with updated macroeconomic forecasts. Inflation will most likely show an update after the recent high readings that surprised both the Fed and markets. We expect the strong and sustained economic recovery to convince a majority of Fed rulers of higher policy rates in 2023 instead of 2024. We see risks for the Fed, which attracts the IOER rate (0.1%) and / or the rate paid for his reverse repo. installation (0%). Stimulus payments, continued massive QE and a general shift to longer debt maturities by Treasury are some of the elements that have created a large wall of money that has pushed the front end of the U.S. curve to zero. It was already announced earlier that the Fed will begin selling its $ 14 billion corporate bond later this summer. June will mark the start of also discussing the purchase programs of government bonds and MBS: they will “talk about talk of decline”. It is a first step in what is likely to lead to a decline in MBS purchases first at the end of this year followed by governors in 2022. We expect Powell chair to side with the optimistic forecasts and (very) early declining steps with such a hard possible tone , alluding somewhat to the disappointing payrolls. Inflation will still be considered temporary, but will markets continue to buy this story against an ever-improving background? There is room for some return performance higher in U.S. yields, especially after the recent decline. The dollar could benefit from slightly slower anticipation although much depends on what will cause speeds: inflation expectations (market assumes too slow Fed) or real yields. The first support area of ​​EUR / USD is located around 1,205 (38.2% decline from April to May).

The news

The Reserve Bank of New Zealand said the bank and the finance minister had agreed to update their joint Memorandum of Understanding on macro-prudential policy and add debt limits to the list of possible tools available. These limitations as a debt-to-income limit are intended to ensure that house prices do not deviate too much from sustainable levels. Earlier this year, the New Zealand finance ministry had already given a formal instruction to RBNZ to consider house price sustainability when making financial stability decisions.

Japanese exports in May jumped 49.6%, the biggest gain since April 1980. Exports to China, Japan’s largest trading partner, grew 23.6%. Exports to the United States even jumped 87.9% in May, mainly driven by cars and foreign parts. Exports to the EU climbed 69.6% The sharp growth was mainly due to a lower benchmark last year. However, exports are now also more than 7% above the comparable level in 2019. At the same time imports rose 27.9%. External demand remains a major driver for Japan’s economic recovery, as domestic demand still prevents the coronavirus. BOJ will meet tomorrow and Friday and will likely continue its ultra-easy policy. The yen has weakened about 7% against the dollar since the beginning of this year.