OVERNIGHT NEWS
# Dollar off highs, respite for Euro, GBP and CEE. US 10y yield recovered 18bp yesterday from the lows after services ISM. Brent crude steady around $100/bbl. China Securities Journal advocates yuan stability vs USD amid improving economic recovery.
# Day ahead: ECB speakers Lane, Stournaras, Centeno and Herodotou, BoE’s Mann and Pill, Fed’s Williams and Bullard. Poland CB forecast to hike 75bp to 6.75%. US jobless claims, trade balance, Mexico CPI.
# FOMC minutes: officials signal 50-75bp tightening in July depending on data, economic outlook warrants moving to restrictive policy stance, significant risk of elevated inflation becoming entrenched.
#Japanese investors sold Y1,414tn foreign bonds last week, sixth straight week of selling. Foreign investors bought Y330.5bn JGBs.
# Nikkei +1.4%, EUR 10y IRS +3bp at 2.06%, Brent crude +0.2% at $100.9/b, Gold +0.4% at $1,745/oz.
Poland CB to raise policy rate by 75bp today, SG forecast peak at 9.50%.
Market participants are trying to take stock, with recent risk aversion pausing across asset classes. This leaves USTs, oil prices and equities trading modestly and allowing limited retracement against the USD. After only a modest downfall in the June ISM services and FOMC minutes sticking to the hawkish script, we expect more US data in the form of Initial Jobless & Continuing Claims, ahead of NFP this Friday. In terms of speakers, we hear from Waller and Bullard both on at 13:00 EST, where we expect hawkish headlines. EGBs are under pressure today, ahead of ECB speakers and minutes.
Overnight, China market participants faced a number of headlines – Covid concerns around Shanghai to start, followed by tariff noise that proved to be irrelevant, and finally headlines that the Ministry of Finance could allow local governments to sell USD220bn of special bonds this year to support infrastructure spending. UK political noise reached an apex with PM Boris Johnson now widely expected to resign, though remain as caretaker as the ruling party elects a new leader. BoE Decision Maker Panel relayed hawkish notes, and upticks in wage growth as well as inflation expectations is likely to influence the MPC to consider an outsized move in August.
EM central banks continue to be in focus. CLP markets wait on any signals from the central bank. HUF struggled to perform given an unanticipated 200bps rate hike on the one-week deposit rate, and we see another rate decision from the NBP where Citi Economics calls for an above consensus hike of 50bps, but our trader notes the market has been long PLN as of late. Finally, MXN awaits CPI and also Banxico minutes today.
Latin America:
Latam currencies depreciated across the board amid a stronger US dollar during the session. COP and CLP were the main underperformers. MXN and BRL each depreciated ~0.5%, to 20.72 and 5.44 respectively, while PEN depreciated 0.9%, to 3.89. COP ended the session 1.7% weaker to 4353, off the lows of the session that saw COP weaken as much as 3.0% (to 4394), though the catalyst for the rebound was unclear. CLP was also volatile intraday, with the currency weakening in the first half of the session as much as 4.0%, approaching the 1000 level. However, the currency later rallied, erasing over half the intraday loses, ending the session 1.7% weaker, at 968. The rally was supported by commentary from the Finance Minister, suggesting they are studying measures to take on the exchange rate.
In local rates, most curves followed UST yields higher. Chile local rates underperformed, particularly in the front end and belly of the curve, as the 2y ended 24bp higher, at 8.66%, and the 5y ended 13bp higher, at 6.76%. In Chile, the market has increased the probability of the BCCh hiking 75bp, given the recent CLP depreciation. Market pricing for next week’s meeting stands at 64bp, up from ~50bp in the previous session. In Colombia, COPxIBR rates were regional underperformers in longer-dated tenors, as the 10y ended 16bp higher to 8.95%. Moves in Mexico TIIE, Brazil DIs, and Peru Soberanos were more in line with USTs.