(European) equity markets this morning quite easily found their composure after yesterday’s sudden, tech-driven setback. Still, that move contained a warning that the debate on potential consequences of rising inflation might become a growing source of uncertainty/rising market volatility. European stocks currently are rebounding between 1.0% and 1.5%+. US indices, that already reversed part of the initial intraday loss yesterday, gain about 0.5% (S&P 500). The final EMU (services & composite PMI) brought a substantial downward revision for Italy, but the overall message on the EMU economic rebound (services 50.5; composite 53.8) remained intact. In the US the ADP April private job growth printed slightly weaker/less buoyant than hoped for (742k vs 850k expected) but last month’s upward revision allowed to label the report as largely in line and confirming an accelerating US labour market recovery. The US services ISM unexpectedly declined from 63.7 to 62.7 (64.1 consensus) but details remain very strong nonetheless. Business activity and new orders fell but still stand at a lofty 62.7 and 63.2. New export orders and employment on the other hand rose to 58.6 and 58.8 respectively. After yesterday’s correction, US yields tried to rise early in US dealings, but the move is again running into resistance, with changes of less than 1 bp across the curve. The 10-y yield continues to hover near the 1.60% pivot. Even as yield rises remain modest, the inflation debate continues to linger in the background. The 10-y US breakeven inflation is still testing multi-year top levels (2.45% area) which by definition means that real yields for now remain remarkably subdued (-0.86%). The focus on inflation is supported by a further rise in global commodities with the CRB commodity index near the 2018 top. The US Treasury set the amount of its quarterly refunding at $126 bln, comprising $47.7 bln to refund debt and raising $78.3 bln in new cash. Regarding the debt limit, the statement contains a warning that it expects Congress to raise it in a timely manner. If Congress has not acted by July 31, Treasury, as it has in the past, may take certain extraordinary measures to continue to finance the government on a temporary basis. The market reaction to the Treasury announcement was very limited. German yields are also rebounding modestly after yesterday’s decline (0.5 bp for the 2-y up to 1.2 bp for 30-y). 10-y intra EMU government bond spreads mostly are little changed. Greece outperforms (-4 bp). The Country today successfully sold a € 3 bln 5-y bond.
On the FX market the dollar struggles to extend its recent comeback. The DXY trade-weighted index tested minor resistance in the 91.43 area, but failed break beyond. EUR/USD this morning dropped temporarily below the 1.20 handle, but currently again hovers around this psychological barrier (1.2005). USD/JPY is going nowhere in the 109.30 area. Sterling remains in good shape ahead of a what might be an important day tomorrow with the Scottish election and the BoE policy meeting on the agenda. EUR/GBP declined slightly further currently trading in the 0.8635 area. Looking at this week’s price action, sterling traders apparently are a bit more focused on the BoE tapering debate, rather than on a potential new referendum on Scottish independence.
The US economy added 742k, jobs in April according to the ADP employment report. Consensus hoped for an even slightly better 850k. Details showed job gains were evenly spread between small (+235k), midsized (+230k) and large (+277k) companies. The sectoral divide showed a catch-up of the service-providing sector as economies reopen: +636k vs +106k in the good-producing sector. Within services, job gains were skewed towards leisure & hospitality (+237k) and trade, transportation and utilities (+155k).
The EU announced a proposal “to close the gap in our rule book to make sure that all companies compete on equal footing”. More specifically they want to tighten foreign investment rules to better protect local producers and industries. EU Vice President Vestager added that the goal is to build Europe a stronger and more resilient economy. The announcement comes as the EU and China are working on an investment deal.