Rates: Positive ‘mood’ after US/North Korean Summit; watch US CPI numbers
The mood after the US/North Korean Summit is positive, but the outcome remains vague. An extensive press conference is due later today. Positive risk sentiment and a further increase in US CPI inflation above the Fed’s 2% target are expected to keep core bonds under downward pressure going into key US and EMU central bank meetings later this week.
Currencies: EUR/USD awaits the Fed and ECB meetings
The euro couldn’t sustain early gains. Today’s eco calendar is interesting, with the US CPI in focus. However, FX investors apparently aren’t inclined to place big bets in EUR/USD as they await guidance from the Fed and the ECB meetings. Sterling remains in the defensive. UK labour data and the Brexit vote probably won’t change fortunes for the UK currency.
The Sunrise Headlines
- The US stock markets closed around 0.2% higher with the Trump – Kim Jung Un summit in prospect. Asian stocks reacted positive with the CSI 300 (+ 0.82%) and NIKKEI (+0.60%) outperforming.
- Donald Trump and Kim Jung Un have spoken privately close to an hour at their historical meeting in Singapore. After delegations joined in, both leaders signed a ‘very comprehensive’ letter, stating that the result goes far beyond anyone’s expectations.
- France has taken steps to impose their banks with higher capital ratios to make its financial system more resilient against future crashes or credit crunches (a countercyclical capital buffer). French banks were not impressed by the move.
- IMF’s MD Christine Lagarde says that ‘the clouds over the global economy have darkened’, especially after the G7 summit of last weekend, causing business confidence to decline due to measures that disrupt trade.
- Brexit Secretary David Davis has said to be supporting the ‘compromise customs amendment’ when UK lawmakers vote on amendments to the European Union withdrawal bill later today.
- Japanese PPI numbers were higher than expected with YoY reading of 2.7% (2.1% expected) and a MoM outcome of 0.6% (0.2% expected). The increase in inflation continues, after a cooling down in the first months of 2018.
- On today’s eco agenda we see for the US the NFIB Small Business Optimism and CPI MoM/YoY for May, in the UK the Average Weekly Earnings 3M/YoY (Apr), ILO Unemployment Rate 3M (Apr) and in Germany the ZEW Survey Exp. (Jun).
Currencies: EUR/USD Awaits The Fed And ECB Meetings
EUR/USD awaiting Fed/ECB balance
Yesterday, the euro rallied temporary as Italian FM Tria confirmed Italy’s commitment to the euro. The rally gradually petered out as investors looked forward to the Fed and the ECB later this week. Markets are uncertain which way the balance between both CB’s will go, leaving EUR/USD in an indecisive pattern. EUR/USD closed the day at 1.1784, little changed from Friday’s close (1.1769). A positive risk sentiment (despite a tumultuous G7 meeting) was negative for the yen. USD/JPY closed the session just north of 110. EUR/JPY tested the 130 barrier but retreated later in line with EUR/USD. Overnight, the global media focus is on the meeting between president Turmp and North Korea’s Kim Jong Un. The dollar outperforms the euro and the yen as markets await details the signed statement between the two leaders. EUR/USD trades in the 1.1770 area. USD/JPY extends is trip north of 110.
Today, the data calendar heats up with German ZEW confidence, US NFIB small business confidence and the US May CPI. ZEW sentiment is expected to ease as investors ponder the impact of the Italian crisis and of trade tensions. US headline CPI is expected to rise to 2.8%. Core CPI is seen at 2.2% (from 2.1%). If CPI expectations are met, it supports the case for the Fed to continue/even slightly step up policy normalisation.
Yesterday, the euro initially rallied on a further easing of tensions on Italy. We also assume(d) that risk for a hawkish surprise from the ECB meeting might be bigger than for the Fed meeting. If so, it could be euro supportive. For now, FX investors are apparently not inclined to place big bets on the relative balance between the Fed and ECB meetings. So, more EUR/USD consolidation might be on the cards today. Further out, we keep the view that the ECB preparing markets for the end of APP might be more important for (FX) markets than the Fed holding course. If so, the EUR/USD downside should be rather well protected.
Yesterday, sterling suffered from poor production and trade data. Today, the UK labour data have market moving potential. However, a substantial positive surprise (especially on wages) is probably needed to support sterling. Markets will also keep a close eye on handling of the ‘withdrawal bill’ in the House of Commons. UK PM May ‘surviving‘ the votes might be a ST sterling supportive. However, it is unlikely to change the broader picture. For now we expect, more consolidation around current levels, with no meaningful rebound for sterling as long as there is no clear progress toward a consistent UK Brexit strategy.
EUR/USD in wait-and-see modus as markets await Fed/ecb policy decisions
