- European equities booked small gains in an uneventful trading session with market participants awaiting the speeches by Fed chairwoman Yellen and ECB president Draghi. US stock markets opened cautiously higher.
- German IFO business confidence fell less than expected in August (from 116 to 115.9 vs 115.5 expected) after climbing to three record highs in a row, suggesting that a consumption-led upswing will continue despite concern about a car emissions scandal. The forward-looking "expectations" component beat expectations, rising to 107.9.
- Gary Cohn, head of the White House national economic council, told the FT that Donald Trump will launch a major push on tax reform next week with a speech in Missouri, as the president shifts focus to fiscal policy in an effort to secure a badly needed first big legislative victory by the end of the year.
- The ECB’s €2.3 trillion worth of asset buys propped up growth but failed to boost inflation and may have actually increased risks to financial stability, research published by the Bundesbank showed.
- Headline durable goods orders declined by 6.8% M/M in July, reversing June’s 6.4% M/M gain. However orders excluding transportation increased and beat expectations. Especially the 1% M/M rise in shipments of capital goods orders (non-defensive, ex. air), which feeds into GDP calculations, drew attention.
Rates
Final countdown to Jackson Hole
Core bonds traded rather uneventful today. A stronger than forecast German IFO and good core durable goods orders couldn’t provoke a market reaction ahead of today’s key speeches by Fed chair Yellen and ECB President Draghi in Jackson Hole. Even oil prices stayed steady despite the feared havoc that hurricane Harvey could bring around the Texas coast. Dallas Fed governor Kaplan and Cleveland Fed Mester shed a different opinion on monetary policy with the former arguing in favour of patience and the latter in favour of further normalization. It couldn’t bother investors, though the US Note future (higher) and dollar (lower) reacted when Kaplan said that the Fed’s neutral rate was possibly closer to 2.5% than to 3%. German Bunds underperformed US Treasuries, but there’s no clear explanation for the marginal differences.
At the time of writing, the German yield curve bear steepens with yields 1.7 bps (2-yr) to 2.2 bps (30-yr) higher. The US yield curve flattens with yield changes ranging between +0.8 bps (2-yr) and -0.9 bps (30-yr). On intra-EMU markets, 10-yr yield spread changes versus Germany are negligible, ranging between -2 bps and +1 bp.
We concluded this report before the release of Yellen’s speech in JH. We reiterate this morning’s strategy: Core bond markets are dovish positioned. More subdued inflation readings & ECB/FED Minutes during summer months questioned central bank’s urge to complete a near term tightening push. Expectations of pre-announced policy changes (to be confirmed at September meetings?) by Draghi and/or Yellen seem too low. Therefore, we think that the market reaction will be bigger (in magnitude) in case of a hawkish hint (initiate sell-on-upticks) than in case of keeping the dovish line (test of contract highs).
Currencies
Will Yellen or Draghi change the USD-framework?
The countdown to Jackson Hole continued today. Even so, the data were also interesting and even had a modest impact on FX trading. The German IFO business survey was again very strong and even pushed EUR/USD (temporary) back north of 1.18. Early in US dealings, risk sentiment remained constructive. The underlying details of the US durable orders report were not too bad, provided a cautious USD bid. EUR/USD trades in the 1.1810 area. USD/JPY extended its rebound to the 109.60 area. Will Yellen and /or Draghi change the framework for global FX trading?
Overnight, most Asian equity indices showed modest gains counting down to the speeches of Fed’s Yellen and ECB’s Draghi. The dollar traded marginally stronger. EUR/USD is changing hands just below 1.18. USD/JPY traded in the 109.60 area.
The dollar maintained a cautious positive bias early in Europe. German IFO business confidence held close to record levels, confirming a similarly strong PMI earlier this week. Even so, IFO mentioned the stronger euro as a potential headwind further down the road. The market impact of the rebound was modest, but European yields rose slightly more than their US counterparts, reducing the USD-euro interest rate differential. EUR/USD rebounded from the 1.1780 area to the 1.18 area and even extended gains going into the start of the US trading session. Higher core yields and a cautiously positive risk sentiment kept USD/JPY in the 109.60/70 area.
US durables orders declined as expected sharply in July due to a setback in transport orders. However, we assess the report as modestly positive (better than expected shipments). The dollar initially maintained a cautious bid after the publication of the report. However, soft comments from Fed’s Kaplan blocked any further USD gains ahead of the Jackson Hole speeches. EUR/USD trades currently in the 1.1815 area. USD/JPY hovers in the 109.60 area. The redaction of this report is finished before the publication of the speech of Fed’s Yellen.
EUR/GBP: no follow-through correction
There were no important eco data in the UK today. Sterling trading was order-driven. There was again quite some political position talking ahead of next week’s new round of the Brexit-talks. At least for now, Europe looks like maintaining a tough stance on the separation issues that need to be resolved before the new EU-UK relationship can be discussed. There was little impact on sterling trading. EUR/GBP hovered in the 0.92 area. The euro rebound after the IFO blocked any further downside EUR/GBP correction. Cable traded with a positive intraday bias and sits currently in the 1.2835 area.
