Markets
A constructive trade call between US and Chinese negotiators during Asian dealings jolted European markets as well. The better-than-expected German Ifo indicator also helped to forget about last week’s shocker PMIs. Sentiment deteriorated at the start of the US session though, pushing EMU equities slightly in red. WH advisor Kudlow in an interview saying there’s no plan for payroll tax cuts as well as a disappointing US consumer confidence might be part of the explanation. WS overcame the early weakness however. The S&P 500 again set a new record high. Core bonds fell. USTs outperformed, recouping some losses on Kudlow’s comments. The largest 2y auction ever went without difficulties. The US yield curve bear steepened with yields rising 2.9 bps (10-yr) to 3.8 bps (30-yr). German yields jumped 6 bps (10-yr) to 6.5 bps (30-yr). Rumours the country would extend the wage support programme were confirmed yesterday after the European close. Peripheral spreads narrowed with Greece (-5 bps) outperforming. The dollar traded volatile but within narrow ranges as it awaits new impetus. EUR/USD rose from 1.1788 to 1.1835. DXY closed just above 93. USD/JPY took a more convincing position above 106 (106.39). EUR/GBP edged lower towards 0.90 in a purely technical driven session.
Overnight news flow is scarce once again. Asian stocks trade mixed-to-lower, China underperforming (-1%). Core bonds decline. The Aussie yield curve bear steepens ahead of a huge A$21 bn 2031 syndication. The USD is well-bid. EUR/USD (1.1812) is headed south, USD/JPY ekes out small gains to 106.43. USD/CNY is the exception to the rule, touching 6.90 at opening.
Today’s data (US July durable goods orders) will probably go unnoticed however in the run-up to Fed Powell’s speech tomorrow. Yesterday’s increase in yields – solely driven by rising inflation expectations – could be a sign markets are buying into the Fed striving for a symmetrical inflation objective, allowing price developments to overshoot the 2% target. In this respect, we turn a bit more neutral-to-negative on core bonds, USTs in particular, in a daily perspective. The upcoming record-sized 5-year auction could exert additional downward pressure on US bonds though yesterday’s successful 2y auctions suggests markets have less problems digesting short tenor auctions. The US10y and 30y might creep a little higher in the sideways trading range. Assuming the yield increase mainly comes from rising inflation expectations (and not from real yields), we see little reason for the US dollar to benefit from it. We hold our view of sideways, directionless trading as investors look for a soft Powell at tomorrow’s Jackson Hole conference. EUR/USD’s current downtrend should find support near the 1.18 barrier/high 1.17 area. Sterling trading is recently confined to narrow ranges near key support at EUR/GBP 0.90. There’s some reluctancy for a break lower with Brexit uncertainty lingering. We expect that to remain the case as long as the stalemate in talks isn’t resolved.
News Headlines
Richmond Fed President Barkin said that markets have gotten the message on the Fed’s commitment to aid the economy. The zero rate bound is where policy should be with the downturn probably being longer than thought. Minutes of the Fed’s discount meeting sent a similar message with the virus resurgence holding back the recovery. August US consumer confidence (published yesterday) declined from 92.6 to 84.8, the lowest level since mid-2014 amid high uncertainty on jobs and income prospects.
Tropical storm Laura is upgraded to Category 3 hurricane when it is about to hit the US south coast this week. The Interior Department’s Bureau of Safety and Environmental Enforcement said that the tropical threat has prompted more than 84% of oil output and nearly 61% of natural gas production in the Gulf of Mexico to be shut. US gasoline futures rose to the highest level since March with WTI and Brent crude on the rise as well.
