Investors tune their trading behavior solely to Italian BTP’s these days. Italian yields declined further during the first half of European trading as new elections might be avoided. 5SM Di Maio and President Mattarella’s proposal only need the green light from Lega Salvini. The latter, up unitl now, seems to favour a new poll though given his impressive gain in opinion polls compared to the March vote. German yields mirror Italian ones in this positive risk sentiment and rose further until around European noon. Eurostat in the meantime released a significant surge in May EMU CPI data, both headline and core, but they didn’t really impact trading. Underlying inflation pressure seems to be building in EMU and suggest that a window of opportunity is opening up for the ECB to announce (in July) the future of its APP programma (end by YE2018?). Italian yields bottomed around noon which also marked a turning point in core bond trading, with both the Bund and the US Note future starting to gain ground. Media reports suggesting that Trump wants to ban German cars from the US might have been at work as well. US eco data were good, but printed too close to expectations to stop the rebound of the US Note future. US investors probably also look more forward to tonight’s speech by Fed Brainard and to tomorrow’s ISM and payrolls. Brainard’s voice is currently seen as representing the consensus view around the FOMC table. She’ll probably suggest two more rate hikes this year, but will she keep the option of 3 open? Changes on the German yield curve currently range between -2 bps (5-yr) and -4.6 bps (30-yr). The US yield curve flattens with yield changes ranging between +0.8 bps (2-yr) and -2.1 bps (30-yr). 10-yr yield spread changes vs Germany vary between -4 bps (Italy) and Greece (+4 bps).
The above outlined story counts for EUR/USD trading as well. The euro remained in pole position ahead of European noon until Italian BTP’s made an intraday turnaround. Investors are perhaps losing their patience with Salvini’s opaqueness. Anyway EUR/USD tried to retake the 1.17 barrier, but failed, returning towards the 1.1650 area at the time of writing. EUR/GBP showed the similar bump in trading, but swings were much smaller with the pair locked between 0.8760 and 0.8780.
Inflation in the Eurozone accelerated sharply this month, mainly due to energy (6.2% Y/Y). The annual inflation rose to 1.9% Y/Y in May from 1.2% Y/Y in April. Core inflation, which excludes volatile components like food and energy, clocked in at 1.1% Y/Y, from 0.7% Y/Y in April. Both are at the highest levels since last year. Rising service inflation (1.6% Y/Y) also suggest that underlying price pressure is building.
Italy’s political fate rests on the next move by Matteo Salvini, the leader of the far-right Lega, who must either accept a last-minute compromise to launch a populist government or force new elections later this year (FT).
Washington will announce plans to impose tariffs on EU steel and aluminium imports as early as today, two sources said, while a magazine reported President Trump was now focused on pushing German cars from the country. (Reuters)
US eco data were close to expectations to slightly stronger than expected. April personal income rose by 0.3% M/M as forecast, but spending increased by 0.6% M/M (vs 0.4% M/M consensus). Weekly jobless claims continue to hover near historically low levels (221k). PCE deflators matched projections at 2% Y/Y for the headline reading and 1.8% Y/Y for the core measure. The May Chicago PMI surged from 57.6 to 62.7 (vs 58.3 forecast).