Rates: Small losses for bonds after solid Chinese eco data
Core bonds ended Friday on a quiet note following two days of volatility, especially on the US Treasury market. Solid Chinese eco data inflict small wounds on core bond markets this morning. The eco calendar is thin with only NY manufacturing business sentiment. The start of Q2 earnings season serves as a wildcard this week.
Currencies: Markets await guidance from Q2 earnings
EUR/USD rebounded from recent lows end of last week after Powell’s soft comments were later echoed by other high profile Fed members. We expect a calm start of the week and with the Q2 earnings season looming. EUS/USD should be able to hold near current levels. EUR/GBP retreated from the 0.90 area.
The Sunrise Headlines
- US stocks ended Friday on a high note, gaining 0.45% (S&P) to 0.90% (Dow) with new all-time highs for three major benchmark indices. China outperforms this morning on solid eco data with Japan closed for Marine Day.
- Chinese industrial production (6.3% Y/Y), retail sales (9.8% Y/Y) and fixed investments (5.8% Y/Y) all beat consensus in June. Q2 GDP beat forecasts on a quarterly basis (1.6% Q/Q), matching the 6.2% Y/Y consensus.
- The leadership of the Czech Social Democratic Party will decide on whether or not to pull the plug in the ruling coalition over a dispute with the President who blocks them from replacing the culture minister with their preferred candidate.
- Acting IMF head Lipton, in an interview with the FT, backed the case for central banks to remain accommodative in light of sluggish growth and downside risks.
- US Treasury Secretary Mnuchin warned House Speaker Pelosi last Friday that the US Congress must raise the debt ceiling before leaving for Summer recess or else risking that the government runs out of cash early September.
- Reuters reports that the US may approve licenses for companies to re-start new sales to Huawei in as little in two weeks, citing a senior US official.
- Today’s economic calendar contains US Empire Manufacturing July Business Sentiment. NY Fed governor Williams speaks and Citigroup kicks off Q2 earnings season.
Currencies: Markets Await Guidance From Q2 Earnings
Markets await Q2 earnings guidance
The dollar held strong during European dealings last Friday, initially eking out gains following stronger than expected US CPI the day before. The greenback staged an intraday turnaround, however, after president Trump accused China (again) of devaluing its currency. Voting Fed’s Evans later reiterated the case for rate cuts after Powell paved the way to do so in July while testifying before US Congress earlier last week. EUR/USD eventually closed higher at 1.127 from 1.1254 with US/German yield spreads narrowing in favour of the couple. USD/JPY slipped from the mid 108’s to below 108.
2019Q2 Chinese growth fell to the lowest on record (6.2% YoY). The quarterly dynamics (1.6% QoQ) and the monthly data batch (June retail sales, industrial production) are showing signs of bottoming out/acceleration however. It causes Chinese stocks to outperform. The yuan is little changed. EUR/USD is trading sideways, USD/JPY forces out a return above 108 amid low volume trading (Japan closed).
The week starts off calmly with only the US Empire Manufacturing index scheduled for release. A pick-up to 2 is expected from June’s slump (-8.6). We see risks for a positive surprise following the G20 trade truce renewal but with little impact on monetary policy expectations. This weeks also marks the start of the 2019Q2 earnings season. Citigroup kicks off today but the large string of results isn’t due until tomorrow (J&J, JPMorgan, GS …). With consolidation in core bond yields expected, we assume subdued EUR/USD trading ahead of the earnings season.
EUR/USD drifted lower in the 1.11/1.14 range, but rebounded from recent lows after Powell paving the way for a July rate cut. A rebound to the 1.13 would further ease the downside momentum. But with the most important eco data before the FOMC July meeting printed, we expect little inspired trading going forward.
EUR/GBP retreated from its recent highs at 0.90 end of last week during a mostly technically driven session. Markets await the outcome of the UK Tory race (July 23th) and what it could mean for Brexit. Although sterling recovered somewhat over the past few days, the political uncertainty, signs of a further cooling of the UK economy and technical factors continue to conspire against the currency. We don’t expect any sustained sterling rebound anytime soon
EUR/USD rebounded from recent lows after Powell paved the way for a July rate cut.
