European rates higher as wild ride continues. Hawkish ECB talk continues as well. Media suggest Biden will roll back some Chinese import tariffs this week

With US markets closed for the Independence Day holiday, trading conditions have been quiet. Commodity currencies have found some favour, although going against the grain the NZD has been relatively flat.  The yen has underperformed against a backdrop of much higher European bond yields.

With the US on holiday, there has been little news and market movements have been modest apart from a notable lift in European bond yields.  This reverses some of last week’s massive fall, against a backdrop of ongoing hawkish ECB-speak. Governing Council member Vasle of Slovenia said that there will be more hikes after the September quarter, with a further lift in rates in the December quarter and in the beginning of next year. Bundesbank President Nagel said that the ECB’s very accommodative monetary policy stance would “swiftly be abandoned” and a restrictive policy stance may be needed to achieve the inflation objective.

Nagel also spoke about the ECB’s new anti-fragmentation tool and suggested that the crisis instrument should only be used in “exceptional circumstances and under narrowly defined conditions” and any activation of the took should be “strictly temporary”. Speaking after Nagel at the same conference, GC member de Guindos also talked cautiously on the anti-fragmentation tool.

Germany's 10-year rate rose 10bps, with slightly larger moves elsewhere across Europe, and the 2-year rate rose 11bps. The move continues the wild ride for global rates, with Germany’s 10-year rate moving by at least 10bps over the past four trading sessions and the trading range spanning 50bps over the past week.

Economic newsflow has been light, but Germany posted a $1b trade deficit in May, the first deficit since 1991, with rising energy costs inflating imports and global trade disruptions weighing down exports, alongside reduced exports to Russia.

The US Treasuries market has been closed but futures are currently trading 4bps higher from Friday’s close in yield terms. Yesterday, rates were lower across the NZ swaps and NZGB curves, playing catch-up to Friday night’s offshore moves. Swap rates were 10-12bps lower across the curve, taking them down to levels seen late-May, with the massive upswing during the first half of June now fully unwound. The 2-year swap rate fell to 3.80% from a 4.56% peak and the 10-year swap rate fell to 3.89% from a 4.57% peak. The Australian 10-year bond future is up 6bps in yield terms from the NZ close, suggesting some upside pressure on rates when the NZ market opens today.

In other news, the WSJ reported that President Biden could announce a decision this week to roll back some tariffs on Chinese imports.  It could include a pause on tariffs on consumer goods and launching a broad framework to allow importers to request tariff waivers. While reducing tariffs makes economic and political sense from an inflation fighting perspective there remains the competing political pressure to remain tough against China. USD/CNH and USD/CNY spiked lower on the news headline, but the move has now been fully reversed.

The new helped support the AUD which is up 0.7% from Friday’s close to 0.6860. The NZD is little changed at just over the 0.62 mark, with a lift to 0.6250 not sustained, seeing NZD/AUD down 0.7% to 0.9045. Commodity currencies head the leaderboard, but the NZD didn’t get the memo, with NOK the best performing, up 1.4% and CAD up 0.3%. EUR and GBP are little changed from last week’s close, while the yen is the weakest of the majors against the backdrop of higher global rates. USD/JPY is up 0.4% to 135.70.

In equity markets, the Euro Stoxx 600 index closed up 0.5%, playing catch-up to the late rally in the S&P500 on Friday night. The US market is closed but S&P futures are down 0.4%.

In the day ahead the NZIER quarterly survey of business opinion is released, which is likely to show poor levels of business confidence and activity, but a still-tight labour market and heightened inflationary pressure.  The RBA is widely anticipated to raise the cash rate by another 50bps to 1.35% and this is well priced. Unlike the last two meetings, the rate hike shouldn’t surprise, with RBA Governor Lowe recently suggesting the decision will be between 25bps and 50bps, seemingly ruling out a 15bps or 40bps move, Lowe still obviously not caring if the cash rate doesn’t move to a conventional multiple of 0.25.