Markets

Core bonds trade mixed today with US Treasuries significantly underperforming stable Bunds. Disappointing German ZEW investor sentiment pushed the Bund to an intraday high, but the move lacked follow-up action. The main downleg in the US Note future followed after stellar US retail sales. US Treasuries gently pulled Bunds lower as well. Atlanta Fed Bostic repeated his hawkish critique on current market pricing about Fed expectations. He said that inflation has been in the range of its 2% target for a long time with unemployment at record low levels. Yet, he adds, there is a lot of confusion over the Fed outlook. Whatever the non-voting FOMC member thinks, it didn’t alter the fact that a 25 bps rate cut is still fully discounted for the July 31 Fed meeting. US yields add 3.5 bps (30-yr) to 4.7 bps (5-yr) at the time of writing. Changes on the German yield curve are limited to +0.5 bps across the curve. Peripheral yield spreads vs Germany narrow by 3 to 6 bps with Greece (-8 bps) outperforming. The Greek debt agency successfully launched a new 7-yr bond via syndication. The 1.875% Jul2026 GGB was priced to yield 1.9%, tighter than IPT in the 2.1% area and official guidance in the 2% area. The order book was in excess of €13bn even if the country is still rated “junk” at the three big rating agencies. The Hellenic Republic eventually printed €2.5bn, profiting from the hunt for yield and spread compression caused by the ECB’s dovish forward guidance early June.

Yesterday’s failed EUR/USD attempt to clear the 1.1285 resistance caused a modest setback of EUR/USD yesterday and this morning. The move was mainly technical in nature. Investors awaiting the vote an on the new EC president and a disappointing ZEW German investor confidence were additional reasons for investors to take a cautious stance on the single currency. Early in US dealings, the dollar got a shot in the arm as US retail sales accelerated in June, suggesting that Q2 US growth might be better/less worse than expected. The dollar touched new intraday lows, but any follow-through gains remain modest as markets still expect a pre-emptive Fed interest rate cut at the end of this month. EUR/USD dropped to the 1.1210 area, but the EUR/USD 1.1181 key support is left intact. USD/JPY regained the 108 handle and is trading in the 108.25 area.

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Sterling continued fighting an uphill battle today. The UK labour data were mixed, but showed resilience given recent slowdown in broader economic slowdown. Job growth slowed slightly more than expected to 28K in the 3 months through May but wage growth (3.6% Y/Y) printed at the highest level in more than 10 yrs. Sterling lost of few more ticks after the labour data, but the UK currency was already under pressure for the start of trading in Europe. Investors understood that a reopening of the Brexit talks between the EU and the UK after the nomination of a new UK PM might be very tumultuous. Both candidates to become UK PM indicated they want to remove the ‘Irish backstop clause’ from the Brexit deal, but this is unacceptable to the EU, raising the risks for a no-deal Brexit. EUR/GBP surpassed the 0.90 handle. Cable is at risk of breaking the key 1.2440 support area. A break below could trigger additional stop-loss repositioning away from sterling.

News Headlines

ECB’s Villeroy said the central bank should not only be independent from political pressures but should also avoid ceding to market pressures, referring to the drop in market based inflation expectations. He added the ECB is data dependent and will “act accordingly if and when needed”.

US June retail sales surprised on the upside with the 0.4% MoM headline figure beating 0.2% market expectations. The core control group printed at 0.7% MoM vs. 0.3% expected. The rise was broad-based with 11 of 13 categories showing increased sales with non-store retailers (incl. online) leading. A sharp drop in oil prices at least partially resulted to a decline in gasoline stations sales.

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