Global core bonds treaded water in today’s eco/event thin opening session to a jampacked week. The only noteworthy exception was disappointing June Empire Manufacturing business sentiment which fell from 17.8 to -8.6, the lowest since 2016. Details showed weakness in employment and new orders. This evening’s opening remarks from ECB president Draghi at the central bank’s Sintra conference remain a wildcard. However, we expect the ECB’s number one to hold close to the dovish guidance set out at the previous meeting. The US yield curve currently bear flattens with yields 2 bps (2-yr) to 0.2 bps (30-yr) higher. The German yield curve bear steepens with yields rising up to 2.3 bps (30-yr). The Belgian debt agency successfully tapped 4 OLO’s (€0.8bn 0.50% Oct2024, €0.987bn 0.9% Jun2029, €0.525bn 1.9% Jun2038 & 0.89bn 2.15% Jun2066) for a combined €3.2bn, the maximum on offer. The total auction bid cover was a very healthy 1.99, with especially strong interest for the very long OLO on offer (2.07x) in another sign that investors are buying into the ECB’s dovish guidance early this month. The Belgian debt agency now raised over 76% of this year’s stated OLO funding need (€21.5bn from €28bn).

EUR/USD was looking for direction this morning in the wake of Friday’s steep decline. That move was in the first place driven by the solid US data on Friday. However, investors considering a rising probability of further ECB easing probably was also in play and reinforced the EUR/USD decline. The euro remained in the defensive this morning with EUR/USD hovering in low 1.12 area. Potential guidance from the ECB forum in Sintra probably was an additional reason for euro caution. Even so, the 1.12 support held and EUR/USD regained a few ticks in the run-up to the US trading session. The US empire manufacturing survey posted a big miss (decline from 17.8 to -8.6, 11 was expected). Normally one wouldn’t expect a big market reaction to this indicator just two days before a Fed decision. However, given current uncertainty on the new Fed guidance and on the reaction function of markets (the gap between market expectations and Fed guidance will remain huge), the dollar ceded some further ground. EUR/USD is trading in the 1.1240 area. USD/JPY dropped from the 108.70 area to trade again in the mid 108 area. One can expect more erratic USD trading in the run-up to  Wednesday’s Fed meeting.

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Sterling trading was mostly technical in nature and followed the broader moves of the euro and the dollar as markets await the next vote in the contest for the leadership of the Conservative party, scheduled for tomorrow. EUR/GBP gained a few ticks further north of 0.89 in line with the overall euro rebound. The decline of the dollar post the Empire manufacturing release prevented a further decline cable. The pair is again trading in the 1.26 area. Still, the picture for the UK currency remains fragile. The GBP/USD 1.2560 support remains within reach.

News Headlines

The US Empire Manufacturing index (June) plunged into negative territory (-8.6) for the first time since September 2016, meaning the majority of respondents expect general business conditions to worsen. New orders and employment slipped to -12 and -3.5 respectively. NY manufacturing business conditions 6m ahead also deteriorated compared last month but are still considered favourable (25.7 vs. 30.6).

Iran said that it would breach some of the nuclear limits agreed under the 2015 Joint Comprehensive Plan of Action in 10 days if Europe does not take action to alleviate US pressure on the country. Iran wants Europe to throw an economic life as US sanctions start to take their toll.


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