Eco data managed to impact trading today, but market didn’t really react in lockstep. A very weak German ZEW investor sentiment indicator doesn’t bode well for tomorrow’s Q2 GDP release. Consensus expects a 0.1% quarterly decline, which stems recession fears. The German 10-yr yield already set a minor all-time low ahead of the release (-0.615%) and was immune afterwards. German stock markets showed more vulnerability, declining up to 1%. Sentiment was also hurt by another day of mass protests in Hong Kong resulting in more flight cancellations. The ZEW release remarkably turned intraday weakness of the single currency into intraday strength. Of late, the euro was/is one the preferred safe havens on FX markets. While the German ZEW didn’t trigger a reaction on bond markets, the opposite was true for US July inflation data. Core inflation rose more quickly than forecast (0.3% M/M & 2.2% Y/Y) forcing some investors to scale back some of the most dovish FOMC bets. The increase was the strongest in 6 months with details showing broad-based gains. The release marked the start of an underperformance of US Treasuries vs German Bunds, with FX markets this time unaffected.
Rumours that China will hold trade talks by phone with the US in two weeks and that the US will delay some tariffs until December sparked a turnaround in risk sentiment, sending stock markets, the dollar and core bond yields higher. US yields rise by 8.3 bps (5-yr) to 0.7 bps (30-yr) at the time of writing. The German yield curve bear flattens with yields up to 1.6 bps (2-yr) higher. 10-yr yield spread changes versus Germany range between -3 bps (Italy) and +2 bps (Portugal). The Italian Senate will later today determine a timetable for the vote of no confidence against PM Conte’s administration. EUR/USD switched side of the 1.12 mark, settling from just above this mark to just below it following the trade headlines. EUR/GBP only left the listless 0.9270-0.9290 as sentiment changed, trading around 0.9250 currently. Sterling earlier failed to benefit from strong UK labour market data which shouldn’t surprise with the unresolved Brexit and deadline day rapidly approaching. USD/JPY bounced off 105 support and surged to the 106.50 area.
The UK labour market report beat forecasts, both on the job and the wage gains. The UK economy added 115k jobs in June compared to +60k consensus. The unemployment rate nevertheless rose from 3.8% to 3.9% suggesting an increase in the participation rate. Wage increases (ex. Bonuses) accelerated to 3.9% Y/Y, the fastest pace since June 2008.
German ZEW investor sentiment dropped for a fourth month in a row in August, with the pace of the decline unexpectedly accelerating both for the current assessment (-13.5 from -1.1) and the forward looking expectations (-44.1 from -24.5) components. The latter is the lowest reading since 2011, further stressing recession risks. ZEW President Wambach said that he most recent escalation in the trade dispute between the US and China, the risk of competitive devaluations, and the increased likelihood of a no-deal Brexit place additional pressure on the already weak economic growth.
Bloomberg reports that, according to people close to the matter, regulators responsible for the Dodd-Frank Act rule could work as soon as next week on revisions that include loosening restrictions on banks investing their own money in private equity and hedge funds.