Markets
Core bonds are mixed today with US Treasuries underperforming German Bunds. Risk sentiment remains positive with European indices taking over the Asian, Chinese stimulus-driven, vibe. It proved the perfect theoretic breathing ground for some profit taking on the core bond rally. That turned out to be the case for US Treasuries, but not so for German Bunds which remain resilient. Tonight’s start of the mid-month US refinancing operation is probably at play as well. The upleg of the Bund occurred early this morning, before Sentix data for June suggested that the German economy might be slipping into recession. Good US eco data left no traces on markets. US president Trump stepped up his pressure on the Fed to cut rates again and even referred to the (too) strong dollar. The US yield curve bear flattens with yields gaining 2.4 bps (2-yr) to 0.9 bps (30-yr). Changes on the German yield curve range between +0.2 bps (5-yr) and -1.3 bps (30-yr). 10-yr yield spread changes vs Germany narrowed by 2 to 4 bps. Italian PM Conte said that his deputy PM’s agree to avoid an infringement procedure on debt.
The post-payrolls’ USD decline slowed yesterday. The US currency found a better bid as US yields bottomed. The US not raising tariffs on Mexican imports also supported US yields and the dollar. The USD consolidation continued today. EUR/USD tried a shy upside test this morning, but the move was blocked by a gradual further rise in US yields. The NFIB small business confidence printed strong. The direct impact on the dollar was limited, but the USD currency stayed well bid going into the start of US dealings. EUR/USD slipped to the low 1.13 area. President Trump in a tweet indicated that the euro and other currencies are devaluated against the dollar and that Fed policy is (much) too tight. The headlines caused some gyrations but no clear USD trend. EUR/USD  hovers in the 1.1315/+20 area. USD/JPY is trading near 10870.
UK eco data often were of second tier importance for sterling trading of late as sterling traders were focused on the gyrations in the Brexit process and the political battle to succeed Theresa May. This political focus for sure will return to the forefront in over the coming weeks. However, today UK labour data finally also triggered an intraday move of significance. April employment growth (32K on 3M3M) and weekly earnings growth (3.4% Y/Y core) were stronger than expected. The report followed recent comments from BoE’s Haldane and Saunders that the BoE might have to raise interest rates in the near future. Markets still see a low chance of the BoE raising interests rates while at the same time the Fed is expected to ease policy. Even so, the market couldn’t completely ignore the combination of BoE guidance and strong data anymore. EUR/GBP dropped temporarily from the 0.8930 area to the 0.89 big figure. Later the session, comments from BoE’s Broadbent were more balanced. Even so, a BoE rate cut looks not evident short-term. Markets pondering this scenario might help to prevent/slow a further decline of sterling short-term. EUR/GBP is trading near 0.89. Cable hovers in the low 1.27 area.
News Headlines
Czech inflation accelerated from 2.8% YoY in April to 2.9% in May, beating market’s 2.7% estimates. Inflation has been around 3% since March, above the central bank’s (CNB) 2% target. Yet markets do not expect the CNB to hike rates substantially going forward given current economic conditions. The Czech koruna barely gains (EUR/CZK 25.63).
May inflation slowed to 2.5% YoY (down from 2.9%) in Norway. Core measures also retreated (2.3% vs. 2.6% in April). Markets expected both figures to stabilize. A knee-jerk reaction in EUR/NOK to 9.83 as doubts on a June rate hike rise was soon offset by a Norges Bank regional survey of business that showed the most optimistic outlook in seven years. The couple is now trading at around 9.76.
