Markets
Core bond trading was dull until around European noon, when core bonds started to catch a bid. The eco/event calendar didn’t provide the impetus, as heavy (EMU) bond supply and stronger-than-expected US eco data (weekly jobless claims and Philly Fed business outlook) suggested a move in the other direction. Instead we think that global dollar strength was the catalyst, influencing other markets. The stronger dollar put EM currencies under new selling pressure, weighing on risk sentiment (stock markets, EM bond markets) and providing a safe haven bid into the US Note future and German Bund. Moves remain small though and technically irrelevant. The German yield curve shifts 0.3 bps to 0.7 bps lower. The US yield curve flattens marginally with daily yield changes ranging between +0.4 bps (2-yr) and -0.7 bps (30-yr). 10-yr yield spread changes vs Germany are nearly unchanged.
The USD rebound that started on Tuesday resumed today. Recent positive comments from Fed’s Powell on the economy still gave the dollar the benefit of the doubt. Some other factors were also in play. A cautious risk-off sentiment and further outflows from emerging market currencies probably also supported the US currency. Early in US dealings, jobless claims declined multi-decade low and the Philly Fed business outlook improved again more than expected. In line with recent price action, the strong US data hardly lifted US yields. Still, it support further USD gains. EUR/USD dropped (temporarily?) below the 1.16 big figure. The gain in USD/JPY is more modest, but the pair also tries another attempt to regain the 113 big figure. The trade-weighted dollar (95.50 area) reached the highest level since July 2017. A sustained break beyond the 95.50 area can be seen an indication of an improvement in the broader USD sentiment.
Today, the UK political debate on Brexit eased after a tumultuous battle in Parliament earlier this week. However, this temporary ceasefire didn’t help sterling much as there is no real progress on any key topics Brexit topics yet. In this respect, the EU commission called EU member states to prepare for a no-deal Brexit. Aside from Brexit, the UK June retail sales also missed the market consensus. Sales declined 0.5% M/M to be up 2.9% Y/Y (0.2% M/M and 3.5% Y/Y was expected). However, May sales were revised slightly higher and sales for the whole April/June period suggest a decent contribution of the retail sector to Q2 GDP growth. Sterling slightly lost further ground after the release. However, the report didn’t question market expectations on an August BoE rate hike (still above 80%). EUR/GBP trades currently in the 0.8930 area. The 0.8968 resistance remains within reach, but for now no test occurred. Cable dropped below the 1.30 mark, but part of this declined occurred after strong US early morning data (claims, Philly Fed).
News Headlines
The Irish economy slowed -0.6% QoQ in the first quarter of 2018. The positive contribution from IT and communications (13.7%) was more than offset by a decline in growth of the industrial (-9.7%) and entertainments (-3.7%) sector.
The EU is considering import tariffs on American goods should trade talks between EC President Juncker and US President Trump on July 25 fail to head off potential US duties on European cars. EU retaliatory levies would apply to 20% of the total volume the US targets.
While UK’s PM spokeswoman said current Brexit progress suggests a “no deal” scenario is unlikely, the EU urges its Member States to step up preparations for such an outcome as it warned for the “considerable disruption” it would cause for businesses and citizens.
