- European stock markets gain around 1% today, supported by a weaker euro. US stock markets opened positively as well, between +0.3% and 0.5%. US eco data printed to close to consensus to trigger a reaction.
- US personal income rose at a faster than expected clip (0.4% M/M) in July, following a flat outcome in June. Personal spending rose in line with expectations by 0.3% M/M in August, suggesting healthy consumption spending during Q3. Also the PCE and core PCE were in line with expectations, both up 0.1% M/M and 1.4% Y/Y.
- EMU inflation rose faster than expected in August to 1.5% Y/Y from 1.3% Y/Y previously, but underlying measures that exclude volatile energy prices remained stagnant at 1.2% Y/Y, adding to the headaches facing the ECB ahead of its monetary policy meeting next week. EMU jobless rate held steady in July at its lowest level (9.1%) since 2009
- Canada’s economy grew at a rapid pace in the second quarter, easily beating economists’ expectations. GDP rose at an annualised pace of 4.5% in Q2, following a 3.7% increase in Q1 and compares to the consensus of 3.3%.
- The US Department of Energy has authorised the release of half a million barrels of crude oil from the nation’s Strategic Petroleum Reserve to Phillips 66′s refinery in Lake Charles, Louisiana, as the refining hub on the US Gulf Coast struggles with the fallout from Tropical Storm Harvey.
- Reuters published an ECB report based on unnamed sources that said that "the exchange rate has become a bigger issue". EUR/USD was hit by the publication.
- Michel Barnier, the EU Commission’s Brexit chief, said there has been no "decisive" progress in talks with the UK at the conclusion of the third round of formal negotiations. Some progress was made on North Ireland, free travel area, the right of frontier workers and the European Court of Justice.
- • India’s economic growth slowed for the fourth consecutive quarter to 5.7% in Q2, the weakest performance since early 2014, blamed by some on the lingering the impact of last year’s cash ban and caution ahead of the adoption of a new VAT system.
- The Bank of England risks falling behind if it does not raise interest rates soon, according to Michael Saunders, a member of the bank’s monetary policy committee. He laid out his case for raising rates. Saunders dissented pleading for higher rates at previous BoE’s meetings. His views were well known.
Rates
Core bonds going nowhere
Core bond had a fairly boring session and trade currently near yesterday’s closing levels, as eco data couldn’t make the difference. Equities and crude oil rallied higher, but had no impact on bond trading. US and German yields are virtually unchanged (changes between flat and 0.4 bp). The calmness in the bond market convinced investors to look to the "riskier" peripheral bond markets. In the intra-EMU bond market, 10-yr yield spreads versus Germany narrowed 2-to-4 bps, Italy outperforming.
The Bund opened slightly lower, but traded sideways for the remainder of the morning session. EMU headline inflation printed at 1.5% Y/Y in August, a bit stronger than consensus, but after yesterday’s national data that wasn’t a surprise. Core HICP inflation stabilized at 1.2% Y/Y, suggesting that the underlying inflation still doesn’t give any sign of a sustained acceleration. ECB president Draghi wants to see a sustained uptrend in underlying inflation and that’s still missing. Therefore, no reason to move the Bund. Around noon, a Reuters article signalled ECB unease (unnamed sources) about the strength of the euro. The euro weakened and the ECB concern could have been the trigger for a minor move higher of the Bund to just above opening levels. In the afternoon session, the US eco data (personal income & spending, PCE deflators, initial claims) were all in line with expectations, keeping most investors sidelined. The release of the payrolls and ISM’s tomorrow was part of the explanation of the reigning lethargy in bond trading. At the time of closing our report, the Chicago PMI will be released, but it is unlikely to stir the pot.
Currencies
Dollar maintains gains going into the payrolls
The dollar maintained its gains since Tuesday’s rebound, but the rally slowed today. US data were not strong enough to inspire additional gains. At the same time, the euro declined further on rumours that the ECB was worried about the rise of the euro which might slow the start of the normalisation process. EUR/USD trades in the 1.1845 area. USD/JPY is changing hands at around 110.40/50.
European equities opened with decent gains, supported by a good performance in the US yesterday evening. The recent decline of the euro was also supportive for European equities. Initially, there was no clear trend on European interest rate markets and in EUR/USD or USD/JPY. EMU inflation printed slightly above the consensus at 1.5% Y/Y (1.4% expected). Last week, this inflation report had probably triggered further euro gains. However, sentiment has changed over the last two days. The reaction on European bond markets and in the major euro cross rates was almost non-existent. On the contrary. Late in the morning session, inevitable rumours from sources in the ECB appeared. They suggested that the recent rise of the euro was a sources of concern. It could cause the ECB to slow the reduction of QE asset purchases. EUR/USD dropped to the 1.1840/45 area. USD/JPY stabilized in the mid 110 area.
The dollar remained will bid early in the US. Especially the correction of EUR/USD continued, probably still driven by the ECB rumours. An intraday correction of EUR/JPY also put some additional pressure on the euro overall. The US early morning eco data (spending and income, PCE deflators, claims…) were almost exactly as expected. Markets apparently expected strong(er) data. Whatever the reason, the comeback of the dollar eased a bit. EUR/USD trades currently in the 1.1855 area. USD/JPY holds near 110.35. The dollar made a nice technical comeback over the last 48 hours. The payrolls will decide whether there is room for a further, data-driven comeback of the dollar.
Sterling rebound (against the euro) slows
Sterling trading showed a mixed picture today. There were no data with market moving potential. In a speech, BoE policy maker Saunders (one of the dissenters in favour of a rate hike at the August meeting) repeated that risks and uncertainty related to Brexit aren’t enough a reason to maintain an overly loose monetary policy. However, his view was well-known in the market and barely triggered a reaction. At the end of the third round of Brexit negotiations, EU Barnier repeated that progress was insufficient, making it impossible to address other topics beyond the separation. The stalemate in the negotiations maybe was a slightly negative for sterling. Sterling declined against an overall stronger dollar. GBP/USD dropped to the 1.2855 area, from where a limited intraday rebound occurred. EUR/GBP rebounded temporary early in Europe, but the pair turned again south after the ECB rumours later in the session. EUR/GBP trades again in the 0.92 area, close to the recent low. That said, a further decline of EUR/GBP is clearly less evident than is the case for EUR/USD.
