Fed minutes confirmed that the bond tapering was set to begin this year.

Headline US CPI data was slightly higher than expected with the core reading in line with expectations. Fed minutes confirmed that the bond tapering was set to begin this year.

US Treasuries recovered from an initial dip with yields moving lower as the bar for higher interest rates remained high. Wall Street equities posted a limited net advance despite a high degree of uncertainty.

The dollar secured only a brief advance and lost ground as yields retreated. EUR/USD secured a net gain to 1.1600 before stabilising. Sterling held firm on elevated yields and some Brexit optimism with GBP/USD near 1.3680.

The Swiss franc secured net gains as its long-term hard-currency credentials boosted demand. Commodity currencies posted significant net gains as the US dollar lost ground and metals strengthened.

Euro-zone industrial production declined 1.6% for August with the year-on-year rate slowing to 5.1% from 8.0% previously, although this was slightly stronger than expected. There were reports that the German economic institutes would cut their 2021 GDP growth forecasts to 2.4% from 3.7% due to serious supply-side issues.

German bonds rallied ahead of the New York open with yields retreating from 4-month highs. There was, however, an increase in market-based Euro-zone inflation expectations to the highest level in close to seven years at around 1.87%.

US consumer prices increased 0.4% for September, slightly above consensus forecasts of a 0.3% increase with the year-on-year rate edging higher to 5.4% from 5.3% previously. There was a further significant increase in energy prices with a gain of close to 25% over the year. There was a monthly decline for apparel and used car prices which helped moderate overall price increases. The core increase was in line with expectations at 0.2% with the annual rate remaining at 4.0%.

The dollar initially edged higher, but failed to sustain the move as lower yields undermined potential support with EUR/USD recovering to around 1.1570.

Minutes from September’s Fed policy meeting confirmed that the tapering of bond purchases could begin in mid-November or December and it would be appropriate to complete the process around mid-2022 with reductions of $15bn per month. There were, however, also comments that a distinct and more stringent test would need to be met before there was interest rate increase. There were diverse opinions surrounding the inflation outlook, although the majority of members thought that risks were skewed to the upside. There was also further uncertainty surrounding the labour-market outlook with some members considering that a full recovery was unlikely.

The dollar recovered briefly after the minutes, but lost ground again with tapering priced in and EUR/USD rallied to highs at 1.1600 before fading marginally on Thursday.

Chinese new loans increased CNY1660bn for September after a CNY1220bn increase the previous month, although below expectations of CNY1850bn.

US Treasuries dipped lower following the CPI releases with a stronger than expected increase in wages reinforcing expectations of higher inflation. The 10-year yield briefly increased to near 1.60%, but there was a sharp reversal as Wall Street opened with the yield dipping below 1.55%.

Fed Governor Bowman stated that she was comfortable with starting the Fed tapering process in November with a further raft of speakers due on Thursday.

The decline in yields tended to sap dollar support with a USD/JPY retreat to below 113.50.

Bank of Japan member Noguchi stated that a reduction in monetary stimulus is not an option and there was further evidence that officials were comfortable with a weak yen. Chinese producer prices inflation strengthened to a 25-year high of 10.7%, maintaining global inflation concerns.

The yen overall remained under pressure, especially on the crosses with USD/JPY trading above 113.50 at the European open and EUR/JPY around 131.65.

There was muted reaction to the latest batch of UK data with slightly weaker than expected GDP growth for August offset by a stronger release for industrial production. There were still reservations over the outlook, especially with escalating energy costs which will have a negative impact on all sectors of the economy.

The NIESR estimated that GDP also increased 0.4% for September with the rate of monthly growth slowing to 0.2% throughout the fourth quarter. Sterling overall was held in relatively tight ranges, but there was further GBP/USD support below 1.3600 with a rebound to near 1.3650 while GBP/EUR edged higher to 1.1800.

The EU confirmed that it proposes major changes to the Northern Ireland protocol with the potential for most checks on British goods scrapped. The relatively constructive tone from the EU helped underpin UK sentiment, although markets still expected prolonged negotiations.

Economic Calendar

07:30CHF PPI (M/M)(SEP)0.70%
07:30CHF PPI (Y/Y)(SEP)4.40%
11:10BoE MPC Member Silvana Tenreyro Speech
13:30USD Initial Jobless Claims323K326K
13:30USD Continuing Jobless Claims2675K2714K
15:00FOMC Member Raphael Bostic speech
15:30USD Crude Oil Inventories-0.418M2.346M
18:00FOMC member John C. Williams speech

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