Global core bonds lost ground today. Overall risk sentiment improved on reports that Italy will lower its proposed budget deficit for 2020 to 2.2% and 2021 to 2.0%, both coming from 2.4%. The Italian BTP future rallied higher at the European opening bell while the German Bund turned south. Both movements didn’t carry through as investors were not convinced that the proposed budget deficit cuts would smooth differences with the EU. The final EMU services PMI (September) and August EMU retail sales were close to forecasts and had no influence on trading. Italy’s FM Tria commented around noon that Italy will seek an accelerated debt reduction in the coming years, committing to cut debt toward EU objectives. This initiated a fresh push for Italian BTP’s, bringing them back to opening levels. US Treasuries were steady today throughout European trading hours. US eco data proved stronger than expected with ADP saying US firms adding 230k jobs in September (est.: 184k). Speeches of Fed members had little impact. The US T-Note lost little ground. German yields add 1.5 bps (2-yr) to 2.5 bps (10-yr) today with the belly underperforming. 10-yr spread changes vs Germany are decreasing with Italy (-17 bps) outperforming. The US yield curve shifts 1.6 bps (2-yr) to 1.9 bps (10-yr) higher.

EUR/USD spiked higher early this morning, driven by an Italian “concession” to limit the budget deficit at 2% in 2021 instead of the 2.4% in the original plan, ‘informally’ rejected by the EU. The pair slowly but steadily lost the initial gain in today’s lower volume setting (Germany closed) as markets ponder whether Italy’s new proposal will withstand EU scrutiny. Mixed EMU data (slightly softer final PMI, August retail sales) were no help for the common currency. US eco data, on the other hand, might have been USD supportive. According to the ADP, the US created 230 000 additional jobs in September vs. 184 000 expected, suggesting yet another strong (official) payrolls report due this Friday. So, a soft euro vs. a firm dollar pushed the pair lower throughout the day. EUR/USD is currently trading at the 1.1530-zone. USD/JPY also edges higher today. The 114-mark is again on the radar.

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Sterling witnessed some swing trading today. After losing ground after Boris Jonhson’s speech at the Tory party conference yesterday, Italy laid the foundation for this morning’s first upleg in EUR/GBP. The pair soon lost ground as Italian question marks persisted weighing on the euro. UK PMI’s were mixed-to-better, providing some limited support for sterling. However, the move reversed as PM May’s keynote speech to conclude the party conference, approached. May’s parley was much ado about nothing from a markets point of view. She barely touched upon Brexit and mainly reiterated (implicitly) her wish for the Chequers proposal to be accepted. EUR/GBP followed EUR/USD lower. The pair trades near 0.8875. In cable, sterling outweighs dollar, trading slightly higher near 1.30.

News Headlines

Turkish inflation numbers spiraled out of control in September following this Summer’s collapse of the Turkish currency. Headline, core and producer price inflation all surged more than expected, respectively by 24.52% Y/Y, 24.05% Y/Y and 46.15% Y/Y. EUR/TRY briefly returned above 7 on the release.

The UK services PMI declined slightly more than forecast in September, from 54.3 to 53.9. The final EMU services PMI was confirmed at 54.7. The US non-manufacturing ISM printed again very strong at 61.6 from 58.5 (vs 58.0 expected). ADP data showed that hiring occurred at the fastest pace in 7 months in an already tight US labour market. Private payrolls increased by 230k (vs 184k expected) from an upwardly revised 168k.

Saudi Energy Minister Al-Falih said that the Kingdom is currently pumping about 10.7 million barrels a day, just shy of November 2016 record output. Oil prices remain near cycle tops though (Brent crude >$84.5/barrel) as the output increase isn’t expected to match the decline in Iranian output.


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