Core bond investors took the day off today. Bunds and US Treasuries treaded water throughout this week’s final trading session apart from a corrective bear flattening move early in Asian dealings on the US Treasury markets. Investors tilted heavily yesterday on dovish NY Fed Williams comments, frontrunning on a 50 bps July rate cut. The NY Fed later sent out a clarifying statement that his quotes shouldn’t be interpreted in light of the July meeting. That statement triggered this morning’s correction. Voting St Louis Fed Bullard reiterated today that a 25 bps rate cut will do for now. US yields rise by 4.8 bps (2-yr) to 1.1 bp (30-yr) on a daily basis. Changes on the German yield curve range between -1.8 bps (5-yr) and +0.1 bp (30-yr). 10-yr yield spreads vs Germany are unchanged with Greece (+4 bps) and Italy (+8 bps) underperforming. Rumours hint that the Italian deputy PM and Lega leader might pull the plug on the government next week, triggering snap elections and banking on his (party’s) popularity (despite “Russiagate”). Italian law stipulates that 45-70 days are needed between elections being called and the actual vote.

Yesterday evening and overnight, it looked that some Fed-heavyweights including NY Fed Williams were laying the groundwork for aggressive Fed easing in the near future, at the same time paving the way for a soft dollar going into the July 30-31 Fed meeting. However, the Fed communication clearly lacks coordination as some of the yesterday’s dovish interpreted signals were almost immediately downplayed/amended. So, the case for any more pronounced USD decline proved premature, especially as next week’s ECB meeting contains some ‘dovish risks’ too. EUR/USD reversed yesterday’s intraday rebound and is again trading in the 1.1225 area.  USD/JPY also rebounded as is currently changing hands in the 107.75 area.

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Some tentative constructive headlines on Brexit and solid UK retail sales yesterday caused investors to find themselves being positioned too much sterling short after recent protracted slide the UK currency. Sterling rebounded both against the euro and the dollar, even as the first Brexit steps of the new UK PM remain highly unpredictable. Today, sterling gained slightly further ground against the euro, but struggled against an overall stronger dollar. UK monthly budget data showed a growing/higher than expected UK budget deficit, even at the time when the new PM still has to unveil his fiscal stimulus plans. However, for now, fiscal policy isn’t an issue for sterling trading yet. The outcome of the ballot for the new UK Conservative party leader/PM next week remains the next point of reference for sterling trading. EUR/GBP declined a few more ticks today, currently trading in the 0.8975 area. At the same time, cable is drifting back lower in the 1.25 big figure.

News Headlines

Germany’s Angela Merkel continues “to support the goal of a balanced budget”, she said during her summer news conference in Berlin. Germany is facing increasing pressure to loosen the fiscal reigns as it suffers from an economic slowdown with little signs of a trend reversal yet.

Belgium consumer confidence advanced marginally from levels seen at end 2016 (-7) to -6 on an improvement in the economic outlook and expected saving capacity. After falling dramatically end 2018, consumer confidence has been more or less stable since.

US president Trump expressed discontent with the Fed’s policy yet again, tweeting that the Fed’s policy led the US to pay higher interest rates “than countries that are no match for [them] economically” when they in fact should be lower. He urged the central bank to “correct” the situation.


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