Core bonds extended yesterday’s prelude, trading with a small downward edge in low volume circumstances. Negative risk sentiment on stock markets resulting from BASF’s profit warning, couldn’t boost bonds. It strengthens our hypothesis that the core bond rally is running out of steam, with room for consolidation or profit taking going into the FOMC meeting at the end of the month. Today’s eco calendar only contained June NFIB small business optimism which fell more or less as expected from 105 to 103.3. An avalanche of Fed speakers still feature today and later this week, but we deem it unlikely that they’ll alter the view of a 25 bps insurance rate cut to keep the US economy going. The US Treasury starts its mid-month refinancing operation later today which might cause some further underperformance of US Treasuries. US yield add less than 1 bp across the curve at the time of writing. Changes on the German yield curve are as unmeaningful. Peripheral yield spreads vs Germany narrow up to 6 bps. Italy outperforms after a successful syndicated tap of the 50-yr BTP (€3bn 2.8% Mar2067). The order book was in excess of €17bn. Greece underperforms (+11 bps) with some profit taking following this weekend’s expected parliamentary election win for New Democracy.

Trading in the major dollar cross rates remained technical in nature today as investors kept a cautious approach ahead of tomorrow’s hearing of Fed chair Powell. The dollar recently recouped some interest rate support against the likes of the yen and the euro as decent/solid US eco data caused investors to pare bets on aggressive Fed rate cuts anytime soon. Today, the news flow was thin and interest rate differentials also brought little guidance for USD trading. Still, investors were relucted to row against a US positive tide as Fed governor Powell might keep a balanced, even cautiously positive tone on the US economy even as he supports the idea of pre-emptive Fed rate cuts. EUR/USD dropped temporarily below the 1.12 barrier, but key support at 1.1181 was left intact. USD/JPY came with reach of the 109 big figure but the hurdle was a bit too high. The pair returned to the 108.75 area.

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Sterling continued fighting an uphill battle today as persistent political uncertainty, signs of a sharp cooling of the UK economy and technical factors all conspired against the UK currency. Regarding the Brexit impasse, Parliament/Conservative MP’s are still preparing step to prevent the new UK Prime Minister from pushing through a no deal Brexit without Parliamentary approval. This morning, poor BRC retails sales (-1.6% Y/Y) completed a series of disappointing UK eco data of late, suggesting a standstill or even a potential contraction of Q2 UK growth. Recent poor eco data also raised the chance of the Bank of England to give up its call for a rate hike and joining the easing bias of most other central bankers. Last but not least, cable (1.2450) dropped below the 1.2506/1.2481 support area. The euro also isn’t in really good shape against the likes of the dollar. Still, EUR/GBP finally tested the 0.90 barrier, further worsening the global technical picture for the UK currency.

News Headlines

Hungarian inflation (-0.2% MoM, 3.4% YoY) cooled more than expected (0.0% MoM, 3.7% YoY) in June. The figure is grist to the mill of the Hungarian central bank, which kept a wait-and-see approach at the June meeting even though growth is solid and wages are increasing rapidly. The forint declined to EUR/HUF 325.6.

Polish MPC member Lon said the central bank should be ready to ease monetary policy if (the risk of) deflation is looming. He mentioned cutting rates from the current already historic low 1.50% as well as start using unorthodox monetary tools. His comments echo governor Glapinski’s personal view of seeing rate cuts as the next policy move.


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