BONDS: Core FI Yields Pushed Higher By Crude Rally; 10-year Gilt/Bund Steady

Question from MNI Policy Team on the impact of food prices/policy changes on inflation expectations.

A: In the short-term surveys, household expectations often follow CPI, and in particularly food prices. For sure it’s something we should monitor. Over the long term, for various groups the link with food prices is smaller.

• Inflation expectations could fall when the VAT cut pushes down food prices.
• It makes it a little bit tricky, because it could impact inflation expectations downward. I don’t judge this to be a big effect, but it could be so. 

• The Euro is unchanged on Tuesday following slightly weaker-than-expected French PMI data which was then offset by a stellar reading for the German services release. Broadly, EURUSD is consolidating around the 1.18 mark, having bounced firmly from 1.1725 lows on Monday. The trend theme for the pair remains bullish and the recent pullback is considered corrective.
• The Riksbank provided a moderately dovish surprise, cutting the policy rate to 1.75%. However, the communication that rates should be held at the current level “for some time to come” and the positive session for European stock indices has left the Swedish Krona higher on the day. EURSEK has traded back down to 11.00, while last week’s lows reside closer to 10.90. For USDSEK, cycle lows are around 1.4% from current levels at 9.1936.
• NZD (-0.1%) is a modest underperformer across G10, continuing the recent weakness seen in the aftermath of poor GDP figures last week. Additional uncertainty regarding the new RBNZ governor announcement may be providing an additional headwind. The sharp NZDUSD reversal from 0.6000 to current spot levels renews the focus on a significant pivot point at 0.5800, which coincides with the 50% retracement of the year’s range. Below 0.5800, 0.5728 and 0.5636 would be the most obvious targets for a deeper selloff.
• Weaker flash PMI data for the UK adds to the renewed concerns around the fiscal trajectory. GBPUSD holds relatively steady around 1.35 as the pair continues to threaten a breach of the 50-day EMA, which would signal scope for a deeper retracement. The next support to watch lies at 1.3449, a trendline support drawn from the Aug 1 low.
• US flash PMI and Richmond Fed manufacturing highlight the data calendar, while further Fed speak will also be closely monitored.