Core bonds trade again mixed today with US Treasuries underperforming German Bunds, thereby shrugging off overbought conditions. The weakness in the US Note future occurs after yesterday’s first failed test of 2.06% support in the US 10-yr yield. The move accelerated after the Chinese Commerce Ministry released a statement, arguing that the US-Sino trade dispute should be solved through dialogue, based on mutual respect and benefit. Dovish Chicago Fed governor Evans said that monetary policy and the US economy are in a good place right now, but he warned for weak inflation and uncertainty over the trade conflict. St.-Louis Fed Bullard yesterday was the first to openly call for a rate cut “soon”. Several Fed heavyweights speak later on at a Chicago Fed conference. Earlier on the day, the Bund didn’t react to a bigger than expected setback in EMU inflation (headline: 1.2% Y/Y; core 0.8% Y/Y) following the exceptional, Easter-related, rebound in April. The EMU unemployment rate reached a new cycle low at 7.6%. The US yield curve bear flattens with yields 8.2 bps (2-yr) to 5.2 bps (30-yr) higher. Changes on the German yield curve vary between -0.4 bps (2-yr) and -1.3 bps (30-yr). 10-yr yield spread changes vs Germany narrow up to 4 bps (Italy) with Greece underperforming (+7 bps).
The dollar lost substantial interest rate support yesterday on a mediocre US manufacturing ISM, ongoing risk-off sentiment due to lingering trade tensions and Fed’s Bullard plea for a Fed rate cut in a not-that-distant future. USD sentiment was still cautious this morning. EUR/USD filled offers in the 1.1277 area around the open of European equity markets. However, risk sentiment improved and core/US yields bottomed. EMU CPI dropped more than expected to 1.2% Y/Y, but the euro hardly reacted. Recent moves in EUR/USD were USD-driven rather than euro-inspired. A new downtick of the dollar in the run-up to the US session was blocked by comments of Fed’s Evans on the state of the US economy (see above). The Chinese Ministry of Commerce provided reconciliatory comments on the US-China trade talks. Risk sentiment improved further. US yields reversed part of yesterday’s decline and so did the dollar before losing again on Powell’s remarks. EUR/USD is trading in the 1.125 area. USD/JPY also rebounded (currently 108.10 area) but gains remain modest given the intraday rise in US yields and improved equity sentiment.
Sterling trading was still driven by technical considerations. Markets are now waiting on developments with respect to Brexit as the process to choose a new leader of the UK conservative party continues. Poor BRC retail sales and a strong start of EUR/USD pushed EUR/GBP for a test of the 0.89 big figure. However, sterling selling gradually slowed and the euro also couldn’t maintain its positive intraday momentum. A soft UK manufacturing PMI (48.6) didn’t affect intraday sterling trading in any profound way. EUR/GBP (0.8660 area) is currently trading off the intraday peak, but sentiment on the UK currency remains fragile.
EMU inflation decelerated slightly more than expected in May, printing at 1.2% YoY vs. 1.7% YoY in April as the Easter-related boost faded out. Core inflation slipped to 0.8% (vs. 1.3% last month). The EMU unemployment rate unexpectedly declined to 7.6% in April, the lowest since July 2008.
South Africa posted its worst growth figure since 2009. GDP contracted by a whopping -3.2% QoQ (0.0% YoY) during the first quarter of this year, twice as much as markets anticipated. The South African rand lost more than 2% (USD/ZAR near 14.71) as bets on a rate cut by the central bank increase.
During the Chicago Fed conference Fed chair Powell said the central bank is closely watching the impact of the trade developments, adding they will “act as appropriate” to sustain the expansion. The USD and US yields slipped.