A mixed week across asset classes witnessed the global bond rout continue as the market continued to absorb the more hawkish central bank tones. BoE chat was watched closely after the mini-taper tantrum last week, where further conversations were had regarding ‘the continued economic recovery… opening the perspective of a monetary policy normalization’ and there may be a couple of ‘modest rate rises’. Elsewhere, the weak French 30-year auction on Thursday did little to settle markets, German Bund yields bounced and once the 10-year yield breached 0.5% the curve witnessed a sell-off and other sovereign curves quickly followed. Although the JGB curve was not as acutely affected, the 10-year yield did breach tolerance levels and the BoJ responded by intervening to control the yield curve announcing an unlimited fixed price 10-year purchase programme capped at 0.11% to bring the yield back within its targeted 0.10% upper band; the benchmark eventually closed at 0.082% on Friday. The last time the central bank intervened was back in February, 5 months after the policy was introduced.
Staying with Japan, this morning Japan Governor Haruhiko Kuroda said he expects the economy to ‘continue expanding moderately ahead’, and the BoJ stated that ‘exports are increasing’ adding that the ‘Job market continues to tighten… helping consumption gather momentum’. Despite the more upbeat sentiment, Kuroda maintained ultra-loose monetary policy is necessary until inflation moves to stabilise above the 2% target; inflation is currently at a lackluster 0.4%. On the data front, this morning the machine orders print failed to meet expectations, falling 3.6% in June. Japan’s current account surplus for May also disappointed, shrinking on the back of increased imports. The only other noteworthy data this week will be June PPI on Wednesday, where it is expected to come in flat on a month-on-month basis, and fall to 2% yoy. Industrial production and capacity utilisation may grab some interest on Friday.
Elsewhere, the sharply unchanged Fed minutes from the June meeting, released on Wednesday showed that Fed members are unable to agree on future monetary policy mixes. Some called for a delay in hikes, instead looking for the balance sheet unwind to commence in ‘a couple months’; we view this as a September announcement. Meanwhile, some members were the least bit concerned about ‘transitory’ lacklustre inflation, while ‘several participants expressed concern that progress towards the committee's two percent longer-run inflation objective might have slowed’. There was little change to the futures market’s expectations, with the probability of a rate hike by December being priced in at ~52%. On Friday we had the much awaited employment numbers for June, which saw the better than expected non-farm payroll report; 222k jobs were created and there was an upward revision to previous numbers. Other readings missed expectations with unemployment tracking higher to 4.4% despite the participation rate edging marginally higher. Average hourly earnings also disappointed, at 0.2% mom and 2.5yoy, with May’s readings revised lower too. Despite the broadly disappointing numbers, it seems the market’s overly optimistic sentiment is grabbing onto any positive news; thus the yield on the 10-year closed 8bps higher last week, at 2.386%. The dollar (DXY Index) also got a boost off the better than expected non-farm reading, gaining 0.4%.
This week markets will be looking for a positive JOLTS job opening report in the US to support the labour sectors recent strength. The Beige Book should be of some interest on Wednesday with June inflation prints following. Markets will also be looking for any further clues on monetary policy and balance sheet unwinding as Fed Chair Yellen delivers her semi-annual testimony to Congress on Wednesday and Thursday. On Friday, US retail sales figures will be watched closely especially after the disappointing numbers in May; with the Fed watching the control group number, a component of GDP. Markets will also be listening closely to Fedchat this week with the likes of Williams and Brainard on Tuesday, and Kaplan on Friday.
Elsewhere, China’s renminbi weakened marginally, the offshore currency fell 0.34% against the stronger dollar last week. China has of late shown a tolerance for a stronger currency, aimed at attracting further inflows into its capital markets. Meanwhile, cross border flows appear to have stabilised with fx reserves higher in June at USD 3.0568tn. Aside for the successful launch of Bond Connect on the 3rd July, there was not much to report from China from an economic standpoint. Politically it seems Sino-US tensions have reappeared after North Korea’s launching of an intercontinental ballistic missile (ICBM) struck a nerve in the US, with Trump saying he could respond with some ‘very severe things’. Xi Jinping met with Russia's Putin, last week and referred to Russia as China’s foremost ally; both parties responded with calm restraint after North Korea's successful test launch.
This week’s data releases began with this morning’s China’s CPI reading for June, which slightly missed expectations coming in unchanged at 1.5%, PPI was also unmoved at 5.5%. Looking ahead, China’s trade data will be observed on Thursday where, in dollar terms, the market expects exports to have grown 9%, while imports are expected slightly lower from May, at 14%. Away from data, on Friday, China’s financial work conference will announce its framework for the financial regulatory regime.