The ECB awoke from the summer slumber with two opposing speeches yesterday. VP de Guindos said the economy again surprised positively and expects the September forecasts to be revised upwardly. He added that when the economy gets back to its feet, it’s only normal that fiscal and monetary policy normalize as well. Chief Economist Lane, a well-known dove, struck a much more cautious tone. He suggested the central bank could and should wait with adjusting PEPP, saying that keeping financing conditions favourable is key. It would not be fair to say markets completely ignored Lane’s comments but combined with yesterday’s moderately positive risk setting, de Guindos’ did grab most of the attention. That’s also because they are in contrast with what is currently priced in (European) markets. Either way, German Bunds underperformed USTs even as the August Ifo indicator eased more than expected (from 100.7 to 99.4 vs 100.4 consensus). The curve bear steepened with changes varying form 1.1 bps (2y) over 5.6 bps (10y) to 7.5 bps (30y). US yields rose between 0.5 bps (3y) to 4.5 bps (10y). The 5y rose 2.1 bps despite a solid $61bn auction that had strong bidding metrics but tailed slightly. The ongoing rebound in commodities surely helped core bond yields too. The dollar swapped gains for losses as sentiment picked up in US dealings. The trade-weighted DXY fell for a fourth day straight to 92.82. EUR/USD marched higher to 1.1772. USD/JPY for the first time in two weeks closed just above 110. EUR/GBP is struggling for direction these last few days. It is holding an extremely tight sideways trading range between 0.855 and 0.857.

The Bank of Korea hiked rates with 25 bps to 0.75% (cf. infra). Other Asian-Pacific news is scarce, leaving a mixed sentiment to dominate equity markets this morning. China underperforms. Core bonds have an upward bias. The big three on FX markets, the dollar, euro, and the yen, top the G10 leaderboard. EUR/USD holds near yesterday’s close.

Yesterday’s ECB comments especially by de Guindos beg the question: how many others share his views? We may get a little more insight on that with the publication of the ECB minutes today. They usually turn out to be less informative compared to the Fed’s but they are still worth mentioning in the run-up to a potentially pivotal ECB meeting September 9. In this respect we also highlight a slew of other ECB speeches by Rehn, Villeroy and Schnabel today. So today it’s all about the ECB only to pass the baton from tomorrow on to the Fed. The rather excessive move in German/European yields yesterday shows just how little is priced in. The German 10y yield captured a first resistance of -0.44%. It’s not out of the woods yet though. -0.40% is crucial but that might be a bit to soon to conquer today. The same holds for EUR/USD and 1.18. We would like to see European (real) yields and the euro bottom out but that’ll require the ECB first to move more to the hawkish side of the spectrum.

News headlines

This morning, the Bank of Korea was the first major Asian central bank to hike its policy rate, by 0.25% to 0.75%. The BOK governor indicated that after the rate hike policy remains accommodative. The bank also signaled potential further adjustments, depending on financial imbalances, moves by other central banks, and by the developments in the pandemic. With respect to the latter, the governor Lee Ju-yeol indicated that the delta variant is having less negative impact on growth. The BOK expects the economy to growth 4% this year and raised its inflation outlook to 2.1%. The Korean won doesn’t profit from the rate hike and even trades marginally weaker near USD/KRW 1169.

According to Australian Bureau of statistics, payrolls dropped 2% on a national level and 3.7% in the populous region of New South Wales. ABS indicated that’s the result of ‘increasing restrictions in the fourth and the fifth week of the lockdown in New South Wales, including a pause in construction activity’. It also included lockdowns in Victoria and South Australia and travel and broader restrictions across all states and territories. At a national level almost every industry posted a decline in payroll jobs during the last two weeks of July. The Aussie dollar is losing marginally ground this morning (AUD/USD 0.7265) after a (commodity driven) rebound over the previous days.