• German bond yields rebounded a few bps after an outright implosion yesterday but the move clearly lacked dash. Gains get capped to a mere 2 bps at the front-end as US dealings get going. That still leaves yields down almost 40 bps in some, mostly shorter tenors compared to the start of this week as markets adjusted expectations for the peak ECB policy rate. That’s now seen at 2% end 2023 vs 2.5% earlier this week. The trigger were of course yesterday’s PMIs, which showed a variety of factors including inflation biting into confidence, demand and activity. The German Ifo indicator also edged lower today from 93 to 92.3 but at least didn’t bring an outsized negative surprise similar to yesterday. Anyway, the perhaps most important takeaway from this week is that key technical levels that would change the market narrative if broken, survived instead. Peripheral spreads vs. Germany’s 10y yield have widened again somewhat since yesterday. Italy underperforms today by adding 6 bps and trades again 200 bps above Germany. Yesterday’s fallout on US Treasury yields was much more modest and they trade unchanged today going into the weekend. US money markets have shifted expectations for the Fed policy peak to 3.5% for which Fed’s Bullard gave his blessing today. The steep yield drop this week wasn’t confined to core bonds. The likes of Australia fell up to 50 (!) bps (3y). Growth/recession fears clearly were this week’s trading theme. Let’s see if that changes with next week’s European inflation figures due on Friday. The ECB is also holding its Forum on Central Banking in Sintra next week. Commodity markets had a lesser week too. A basket of them extended a decline that started two weeks ago, bringing total losses from the cycle high at 10%. Copper’s rout accelerated and is now trading at its lowest since early 2021.
• Currency markets were an ocean of calm compared to the violent bond market swings this week. EUR/USD tested the 1.06 big figure on Wednesday but called off the attempt for the time being after yesterday. The pair is going nowhere in the low 1.053 area currently. The trade-weighted DXY was looking for direction all week north of 104. There were some interesting data that highlighted the stretch the UK economy is in (high inflation but weakening activity data including retail sales) but that didn’t really come as a surprise to sterling. 0.8561-0.8641 was EUR/GBP’s playground this week. In a broader perspective, the pair is developing nicely in an upward trend channel. Gilt yields on the other hand keenly joined moves on broader bond markets, having fallen between 24 and 35 bps this week. As calm returned to markets, the Norwegian krone seizes the opportunity to strengthen and outperform today after the Norges Bank raised rates by a bigger-than-expected 50 bps hikes yesterday. At EUR/NOK 10.43, gains could have been bigger though.
• Bulgarian parliament voted to drop the country’s veto on the start of EU accession talks with North Macedonia. There are four conditions attached: recognizing the Bulgarian minority in the country’s constitution, no automatic recognition of the Macedonian language, inclusion of protocols in the EU negotiation framework regarding the two countries’ relations and EC monitoring of the deal. North Macedonia didn’t indicate whether or not they agree with these conditions. If so, it could be a potential breakthrough of EU accession of the western Balkans. EU talks with Albania had also been frozen since the Bulgarian veto in 2019 as the bloc treats the two countries together.
• Hungarian PM Orban’s chief political advisor said that they made a proposal to the EU to tap the pandemic recovery fund, but convert the funding for energy assistance. It seems like a long shot given that the EC is still withholding some €37bn in aid, consisting from €22bn in the 2021-2027 EU budget and €15.5bn in pandemic support over concerns of rule of law and graft within Orban’s administration. Hungary needs an agreement with EU by the end of the year or risk losing part of the subsidies for good.