Markets:

There’s no strong story behind today’s market moves. The Bund and US Note future returned past of yesterday’s gains in Asian dealings, but trade sideways since the European open. The only exemption was a brief spike lower on headlines that the German government agreed to largely abolish the Solidarity Tax. The move comes following this weekend initial signals of willingness to engage to some minor fiscal stimulus to support the economy in case of recession.

The launch of a new German 30-yr bond was closely watched. The Aug2050 DBR is the first one on this tenor with a zero coupon. Some feared a buyer’s strike given that mostly buy and hold investors looking for yield (eg pension funds, insurance companies) are interested in these sort of products. The bond eventually drew a meagre €0.87bn bids, far below the €2bn on offer, but a similar amount to last month’s €0.86bn. The Bundesbank had to retain a huge 58.8% of the auction (€1.17bn) for secondary market operations. The average auction yield eventually was -0.11%. Markets didn’t make a fuzz from the outcome. It could have been worse… US yields increase by 2.7 bps (30-yr) to 3.2 bps (5-yr) at the time of writing.

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The German yield curve bear steepens with yields 0.7 bps (2-yr) to 5.5 bps (30-yr) higher. The latter also takes into account a benchmark change though. 10-yr yield spread changes vs Germany are slightly tighter today with Italy (-8 bps) outperforming. Markets take into account that Italian President Mattarella will be able to install a caretaking (technocrat?) government to prepare the 2020 Budget before returning the ballot. EUR/USD is treading water around 1.11 while EUR/GBP traded with a small upward bias in the direction of 0.9150.

Minutes of the July FOMC meeting will be released tonight. Market stress since that meeting made the Minutes outdated given that Powell was saying that it wouldn’t be the start of a cutting cycle. Friday’s keynote address in Jackson Hole will in this respect probably provide us with more clarity on future US monetary policy. In the meantime, US President Trump again lashed out against the Fed for not cutting rates fast enough. He was more upbeat on trade, indicating that they are doing great with China and other countries. Brent crude rose around $1/barrel on commodity markets, driven by a bigger than expected drop in US crude inventories.

News Headlines:

The German government has agreed to largely scrap the “Solidarity Tax” which was designed to fund the cost of German reunification 30 years ago. Currently, about 90% of all taxpayers, including companies, have to pay the tax which yielded nearly €19bn last year. From 2021, only high-earners will have to pay the tax.

Headline Canadian inflation held steady at 2% Y/Y in July with markets anticipating a slowdown to 1.7% Y/Y. Lower costs for services were offset by higher prices for durable goods. The BoC’s preferred inflation gauge, CPI Core – Common, accelerated unexpectedly from 1.8% Y/Y to 1.9% Y/Y.

Belgian consumer confidence dropped to 3-yr low in August (-9 from -6) with households turning the most pessimistic about the outlook in more than 6 years (-20 from -15). The subcomponent measuring concerns about the increase in unemployment rose from 8 to 13, the highest since December 2016.

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