Core bond trading showed two faces today. The gentle downleg since Monday morning was initially extended. The Bund sell-off even accelerated somewhat following better than expected French (!) industrial production data. That’s probably more a reflection of thin trading conditions and one-sided positioning in core bonds than something else. Anyway, the slide lasted up until the release of Fed Chair Powell’s written testimony for US Congress. A deterioration in inflation wording was most striking. The Fed chair pointed out that risks to weak inflation may prove more persistent. That adds to the rate cut case since uncertainties continue to dim the eco outlook. Markets recently put the scenario of an aggressive rate cut in July to bed, but some revamped the idea after the testimony release. US Treasuries gained as a consequence with the front end of the curve outperforming. The US yield curve bull steepened with yield changes varying from -5 bps (2-yr) to -1 bps (10-yr). German yields retraced gains partly following Fed’s Powell but increased still about 5 bps at the longer end of the curve. Peripheral spread changes were mixed with Greece (+6 bps) underperforming and Italy (-4 bps) topping the class.

USD/JPY traded stable in a tight range in high 108 area as investors awaited the testimony of Fed chair Powell before the House. EUR/USD even regained modest growth as French and Italian production data printed stronger than expected and as European yields rebounded off recent lows. In his prepared statement, Powell indicated that risks since the previous FOMC continue to dim the economic outlook and that weak inflation might prove to be more persistent. This suggests the Fed is probably ready to implement a pre-emptive rate cut at the end of this month. Short term US yields declined about 5 bps weighing on the dollar. EUR/USD jumped to the mid 1.12 area. USD/JPY dropped to the 108.60 area. It was understandable for US yields and the dollar to decline on the ‘confirmation’ of a rate cut. Markets are now looking forward to the Q&A of Powell’s hearing, looking for clues on the amount and/or the pace of potential Fed easing. However, it is not sure that the Fed president will be really concrete. A rebound of  EUR/USD to the 1.13 area would reverse the post-payrolls USD rebound and suggest a more neutral sentiment on the US currency. For now, we’re not there yet.

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Sterling regained a few ticks today. The political battle on Brexit between the two candidates for PM and the attempts of Parliament to keep the ability to prevent a no deal Brexit simply continue. UK output data were mixed at best, but the 3M/3M May GDP update printed stronger than expected at 0.3%. NIESR still expects a small contraction of Q2 GDP (-0.1% Q/Q), but a recession will probably be avoided. Sterling rebounded slightly after the release. The absence of follow-through gains after yesterday’s EUR/GBP test of the 0.90 big figure maybe caused some profit taking in sterling shorts, too. EUR/GBP trades currently in the 0.8990 area. However, the MT picture for sterling hasn’t changed in any profound way.

News Headlines

The European Commission left 2019 euro area growth projections unchanged but cut 2020 growth projections in its Summer Forecasts. Trade tensions, political uncertainty and Brexit led to a trimmed growth of 1.4% (from 1.5%) with increased downside risks. Germany (0.5%) and Italy (0.1%) are forecasted to print the lowest growth rates this year.

Norwegian inflation accelerated less than expected in June with headline CPI printing at 0.1% MoM (1.9% YoY) vs. 0.2% expected  and core measures coming in at 0.4% MoM (2.3% YoY) vs. 0.5% anticipated. Any loss of the Norwegian krone was temporary as markets concluded it won’t derail the Norges Bank rate hike intentions.


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