Yesterday’s much-hyped ECB meeting turned out to be only a little different from a non-event. The central bank changed forward guidance for its policy rate. For rates to be lifted from current (or lower) levels, there’s an additional condition to be met other than inflation being durably at the 2% target at the end of the policy horizon and underlying inflation dynamics consistent with reaching that. The ECB now also wants 2% on the tables “well ahead of the end of its projection horizon”. In practice, it just raises the bar for rate hikes going forward; i.e. lower for longer. The parameters and guidance of the in theory temporary instruments APP and PEPP were left unchanged. That in part explained the all in all neutral and muted reaction by the euro and European yields initially, who were bracing for a dovish surprise. Both declined eventually, along with US yields, amid a disappointing European EC consumer confidence, US jobless claims, and below-consensus housing data that underscored market fears for growth topping out. The German yield curve bull flattened with changes up to -3.5 bps (30y). US yields shed 0.8 bp (2y) to 2.2 bps (30y). The US/German real yield divergence is striking with the latter hitting new lows. EUR/USD finished at 1.1771, erasing post-ECB gains to 1.183. Sterling was better bid again, despite the dovish camp in the BoE broadening with Broadbent saying the bank might be right to look through the current and in his view temporary inflation spike. EUR/GBP slipped below 0.86 again to 0.855.
Asian risk sentiment is fragile with Hong Kong and China underperforming (> -1%). Regulators are considering serious penalties for China’s Didi, denting overall tech company sentiment. Japan is still closed. The German Bund gapped lower, underperforming USTs at the core bond futures market. The US dollar has a slight edge on FX markets while the Aussie dollar marginally lags G10 peers, possibly weighed down by a shocking services PMI drop (see below).
Europe stays in the center of attention after the ECB yesterday with PMI business confidence today. The July reading should confirm the economic rebound as restrictions have been eased further going into the summer. We don’t expect the delta variant to have had a serious impact already. Consensus for services lies at 59.3, up from 58.3, and should be met. We can see why economists expect a minor easing from the historical highs in the manufacturing gauge from 63.4 to 62.5. Risks for markets in current circumstances are asymmetric where downside surprises are likely to act as a chilly growth reminder. The technicals in both core (German) bond yields and EUR/USD are still fragile. We retain our target of -0.30% for the German 10y yield and 1.1836/47 for EUR/USD as first references for the immediate downside alert to be called off. UK PMIs are also due but unfortunately probably aren’t the trigger for breaking the stalemate in EUR/GBP. After a false breakout earlier this week, the currency pair entered the downward path within the sideways 0.85/0.87 trading range again.
According the July IHS market Composite PMI, activity in the private sector in Australia contracted as the new virus wave hits activity. The Australia composite output index stumbled from 56.7 to 45.2, a 14-month low and a first contraction in activity since August 2020. Especially activity in the services sector was hit hard, with the index falling to 44.2 from 56.8. Markit mentions an overall contraction in both domestic and foreign demand for services due to the new restrictions. The manufacturing PMI also slowed from 58.6 to 56.8. Overall, employment remained in positive territory, but the rate of job creation slowed sharply. The market reaction to the PMI was modest. Australian bond yields are little changed, holding within reach of the correction lows reached after the recent repositioning. AUD/USD is losing a few ticks, but mainly follows the overall USD performance (AUD/USD 0.7375).
UK Gfk consumer confidence in July improved further to -7 from -9, matching the February 2020 level. UK consumers in particular turned more positive on the climate to make big purchases. Their assessment on the economic situation in the next 12 months eased slightly. Indicators on personal finances were little changed.