Core bond markets oscillated near opening levels today with US Treasuries underperforming German Bunds. The small bear flattening of the US yield curve indicates that US inflation readings, at the highest level since 2012 and drifting further above the Fed’s 2% goal, were at play. US yields add up to 1.3 bps (2-yr). Stocks struggling to maintain their intraday upside momentum and drifting oil prices are on the other side of the balance. German yields decline by 0.9 bps (2-yr) to 1.8 bps (5-yr), with the belly of the curve outperforming. 10-yr yield spread changes vs Germany range between -2 bps (Italy) and +3 bps (Ireland). Today’s Italian BTP auction went well.

In line with recent price action, global markets quite easily recovered from the latest hiccup in the global trade war as the US announced preparing additional import tariffs on $200 bn of Chinese imports. Equities recovered part of yesterday’s losses, with US markets taking the lead. The link between equities on the hand and bonds and FX on the other hand was again modest. A risk-on context usually supports the euro more than the dollar, but today’s market reaction was more indecisive. EUR/USD initially hovered in a tight range in the 1.1670/95 area, but the dollar temporary gained a few ticks in the run-up to the publication of the US CPI data. Yesterday, PPI surprised on the upside of expectations. June CPI rose slightly from May (2.9% headline, 2.3% core), but the report was exactly in line with expectations. FX markets were apparently slightly positioned for a potential upward surprise. EUR/USD reversed the earlier decline. The pair trades again little changed in the 1.1675/80 area. USD/JPY remains an outperformer. The pair extended gains after yesterday’s technical break above 111.40 and trades currently in the 112.50 area.

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The UK government published its Brexit ‘White Paper’ today confirming that it looks to maintain close ties with the EU regarding trade of goods. At the same time, the UK intends to maintain a bigger autonomy for (financial) services. The publication of the White Paper didn’t bring high profile new insights on the UK’s Brexit strategy. For now, it looks that PM May has succeeded a small victory on the hardline Brexit supporters in the government/conservative party. However, the next steps in the Brexit process (both in the UK and regarding the response from the EU) remain highly uncertain. At the time of writing, sterling gains a few ticks on a daily basis, both against the euro (EUR/GBP 0.8825 area) and the dollar (cable 1.3225 area). However, in a broader perspective there are no signs of a sustained sterling rebound yet.

News Headlines

The European Commission downgraded its growth forecasts for this year and next for the EMU (2.1% in 2018 and 2% in 2019). “The downward revision since May shows that an unfavorable external environment, such as growing trade tensions with the US, can dampen confidence and take a toll on economic expansion,” said VP Dombrovskis.

EMU industrial production rebounded in line with forecast in May (1.3% M/M & 2.4% Y/Y). National data published earlier showed that Germany contributed most to the increase which suggests GDP growth to pick-up after a disappointing Q1.

The International Energy Agency warned that global oil outages (Iran, Libya, Venezuela) may push spare production capacity to the limit. Brent crude failed to rebound after yesterday’s huge sell-off.

US eco data printed close to expectations. Weekly jobless claims dropped to 214k and remain near historically low levels. Headline and core CPI inflation rose further above the Fed’s 2% inflation target, respectively at 2.9% Y/Y and 2.3% Y/Y.


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