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Sunset Market Commentary


Today was virtually a copy paste of yesterday: risk aversion with the whole shebang. Equities declined and core bonds enjoyed a safe haven bid. US yields at some point shed about 5bps while Germany saw yields evaporate up to 3 bps. July US retail sales marked a turning point, though somewhat counterintuitively. All gauges disappointed. Headline turnover fell 1.1% m/m (vs -0.3 expected) with 8 out of 13 categories declining. Excluding cars and gas, sales fell 0.7% m/m (vs -0.1%). A super-core measure, the control group which additionally excludes building-materials retailers, office supply stores, mobile homes and tobacco, printed at -1% m/m (vs -0.2%). The sub-consensus reading does not bode well for the future, having last week’s August Michigan consumer confidence in mind. That indicator tanked to levels below the 2020 pandemic trough with US consumers flagging the coronavirus and stubbornly high inflation eating into their disposable income, thus possibly affecting spending. Despite all that, US yields strangely enough recovered after the data release. The 10y yield returned from 1.22% to 1.25% at the time of writing, thereby limiting daily losses to less than 1bp. The 30y variant faces a similar decline. Other yield changes are negligible. German yields were caught in the US slipstream. The curve, now flat, fully erased an initial bull flattening move.

Before turning to the dollar, let’s highlight the notable depreciation of both the Aussie (lost ST support at AUD/USD 0.729) and the kiwi dollar (NZD/USD 0.69 area) first. Both are related to the recent coronavirus developments and what it could mean for monetary policy going forward (see also headline below). The dollar in general is well bid. Its performance even improved after the poor retail sales. The trade-weighted DXY has its eyes set at recent highs around 93. EUR/USD retreats from 1.178 to 1.173. So much for the pair’s Friday comeback. Markets also again embrace the Swiss Franc (EUR/CHF nearing 1.07!). Sterling on the other hand is suffering from the risk context. This morning’s labour market report wasn’t bad at all and even justified the BoE’s hawkish turn earlier this month. But an unemployment rate easing to 4.7%, 95k employment change in the three months to June and weekly earnings soaring to a three-month average of 7.4% just didn’t do the trick. EUR/GBP rose north of 0.85(3). GBP/USD loses a full big figure to 1.375.

News Headlines

New Zealand PM Ardern announced a nationwide three-day lockdown after an Auckland man tested positive for Covid-19, the first community spread since February. Schools, offices and businesses will have to close. Auckland and the Coromandel Peninsula will probably face a tougher seven-day lockdown. “Going hard and early has worked for us before”, Ardern stressed. The infection potentially throws a spanner in the works of the Reserve Bank of New Zealand. Markets discounted the start of the tightening cycle at tomorrow’s policy meeting. Some investors pulled some chips off the table though. NZD/USD fell from 0.7020 towards the low 0.69 support zone. A backtracking RBNZ, which isn’t our preferred scenario, could trigger a drop below 0.6881. Next support stands at 0.6703 (68% retracement on 2020 rally). The NZD swap curve bull flattened with yields ceding 14.3 bps (2-yr) to 9 bps (30-yr).

The flash estimate of Hungarian GDP numbers revealed a 2.7% Q/Q rise, outpacing 1.4% Q/Q consensus and coming from 2% Q/Q in Q1. Non-seasonally adjusted Y/Y growth rose to 17.9%. A detailed reading will only be available on September 1st, but the Hungarian central statistical office mentioned industry as main contributor to growth. Hungarian GDP is now 2.2% larger in absolute terms compared to Q2 2019. The data warrant the Hungarian central bank’s (MNB) hawkish stance and suggest that they could deliver a third consecutive 30 bps rate hike at next week’s policy meeting (Aug 24). Hungarian inflation is still running outside the MNB’s tolerance zone (+1%) around the central bank’s 3% inflation target. EUR/HUF declined marginally today to 351, the strongest HUF-level since early July.

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