- Main European equity indices trade between flat and -0.5%, recovering part/all opening losses. US stock markets open nearly unchanged after the long weekend.
- Most US eco data printed in line with expectations. Personal income and spending both rose by 0.4% M/M in April. The PCE deflator slowed from 1.9% Y/Y to 1.7% Y/Y and the core PCE from 1.6% Y/Y to 1.5% Y/Y. The S&P/Case-Shiller 20-city home price index climbed 5.89% in March, the fastest rate since 2014. Consumer confidence disappointed, declining from 119.4 to 117.9, but remaining near historically high levels.
- ECB policymakers are set to take a more benign view of the economy and will even discuss dropping some of their pledges to ramp up stimulus if needed, sources told Reuters. ECB Hansson said that the outlook for the economy has improved so the question now is how quickly central bank support can be reduced without jeopardizing growth.
- EMU economic confidence dropped back from its post-financial crisis high in May, as a fall in services and retail trade confidence translated into softer sentiment figures. German inflation slowed in May, dropping to 1.4% Y/Y from 2% Y/Y in April while economists predicted a reading of 1.5% Y/Y.
- Donald Trump has repeated his criticism of Germany’s trade surplus with the US and under-spending on defence, ramping up tensions with Berlin after Angela Merkel made watershed comments about the fragile state of the western alliance over the weekend.
- Dallas Fed Kaplan believes that there will be two more rate hikes this year, which could occur as the central bank reduces its balance sheet. However, Kaplan is not basing his forecast on the idea that the economy is about to take off.
- A Greek government spokesman denied a German newspaper report on Tuesday that it was considering opting out of a loan repayment in July if lenders could not agree on debt relief. "It is not true," government spokesman Tzanakopoulos told Reuters. "There will be a solution on June 15."
Rates
Bonds shrug off eco data
Global core bonds had an uneventful trading session, shrugging off a batch of eco data. EMU eco data printed on the softer side of consensus, including a larger setback of German inflation (2% Y/Y to 1.4% Y/Y). They strengthen ECB president Draghi’s case of a very gentle normalisation process. Sources told Reuters that the ECB would start changing its forward guidance, by dropping its easing bias. US eco data (including a small decline of PCE inflation) were in line with expectations and triggered a very small, temporary, uptick in the US Note future. Most investors kept sidelined though with more US eco figures scheduled later this week (ADP, manufacturing ISM, payrolls). European stock markets flat-lined or even recovered some of the opening losses while oil prices continued their way south. None of these markets left a trace on the Bund or the Note future though.
At the time of writing, changes on the German yield curve range between -0.3 bps (10-yr) and +0.9 bps (2-yr). The US yield curve bull flattens with yields 0.4 bps (2-yr) to 2.3 bps (30-yr) lower. On intra-EMU bond markets, 10-yr yield spread changes versus Germany range between -2 bps and +1 bp with Greece underperforming (+5 bps).
The Italian debt agency kicked off this week’s EMU bond supply by tapping the on the run 5-yr BTP (€3B 1.2% Apr2022) and 10-yr BTP (€2.75B 2.2% Jun2027). The combined amount sold was the maximum of the targeted €4.75-5.75B. The auction bid cover was 1.43, which is average for Italian standards. Additionally, Italy raised €1.75B via the floating rate CCTeu (Oct2024).
Currencies
Euro erases early losses. Dollar fails to convince
Different themes guided trading in the major FX cross rate today. Early this morning, euro weakness prevailed as markets pondered whether EMU political risk would again become an issue for trading. However, the euro found its composure even as EMU data were slightly softer than expected. The US data brought no surprise . EUR/USD and USD/JPY showed some intraday swings, but in the end, trading showed no clear trend.
Overnight, Asian markets started with a cautious risk-off bias, but the losses were limited and largely erased as the session proceeded. The yen was well bid. Decent Japanese eco data and a cautious risk sentiment (headlines on political uncertainty in Europe) both supported the Japanese currency. USD/JPY dropped below 111 and tested a first minor support in the 111.80/90 area. EUR/USD was sold early in Asia and settled in the 1.1120/40 area.
The headlines on political uncertainty in Greece and Italy also weighed on the euro and European equities at the start in Europe. EUR/USD touched an intraday low in the 1.1110 area. A spokesman of the Greek government denied that Greece considered defaulting. The euro started a gradual intraday rebound. The EMU eco data (EC economic sentiment and German inflation) were slightly softer than expected. Germany inflation printed at a low 1.4% Y/Y. However, the reports had no big (negative) impact on euro trading.
At the onset of the US session, the euro rally even accelerated as the inevitable ‘sources’ said that the ECB will discuss the removal of its easing bias at next week’s meeting. EUR/USD spiked temporary to the high 1.11 area. Early in afternoon trading, US president Trump in a tweet repeated that the big trade deficit with Germany and the low contribution of Germany to Nato were bad for the US. Tthe bickering between the US and Germany leaves no big traces on global markets and on FX trading in particular for now. However, the issue deserves close monitoring. The US income and spending data (including the deflators) were perfectly in line with expectations. If anything the dollar temporary gained a few ticks as another negative US data surprise was avoided. Especially USD/JPY profited, trying to regain the 111 big figure. EUR/USD is changing hands around 1.1170/75 area. Despite a poor start for the euro this morning, the dollar also still fails to stage a convincing comeback.
Sterling selling slows, but picture remains fragile.
Since mid-last week, sterling came under pressure as polls showed that PM May’s conservative party lost a big part of its lead over labour. Sterling selling eased (temporary) this morning as there was no indication that the lead is eroding further after a television debate of May and Corbyn yesterday evening. EUR/GBP dropped to the 0.8655 area. Cable touched an intraday top in the 1.2885/90 area. However, sterling momentum dwindled again during the US trading session. EUR/GBP trades in the high 0.86 area. Cable is changing hands in the 1.2850 area as sterling softens and dollar caution keep each other in balance.
