Rising US real rates saved the dollar’s downfall during yesterday’s trading session. This time around, the safety net was missing. A disappointing August ADP employment report put things in motion. Net job creation amounted to 374k compared to 638k consensus and dashed hopes of those looking for final progress on the employment front to trigger a September tapering announcement. Fed chair Powell at the virtual Jackson Hole meeting labelled progress towards the employment (taper) goal as “clear” rather than “substantial”. Despite today’s market reaction, we believe the jury is still out. Friday’s payrolls provide a lifeline. Consensus expects 748k net job growth compared to a stellar 943k in July. Back in the day, ADP employment and payrolls reports were closely correlated as one’s gut feeling would suggest. However, over the past years it almost turned out to be a contra-indicator for official payrolls, with July’s 326 ADP gain providing a nice example. Overall, we stick with our view that decent payrolls will be sufficient for the Fed to announce tapering in September, start slowing down net purchases from Q4 and end them all together by the middle of next year.
US Treasuries significantly outperformed German Bunds. The US yield curve bull flattens with yields sliding 0.6 bps (2-yr) to 2.8 bps (30-yr). The German yield curve steepens with daily changes ranging between -0.5 bps (2-yr) and +1.7 bps (30-yr). The post-ADP reaction (lower) in US yields ended the intraday rebound (higher) in German yields. From the start of dealings until early US trading, they added to yesterday’s significant gains. As reminder: they were inspired by a 3% Y/Y EMU CPI reading and by comments from some (important) ECB governors hinting at slower PEPP purchases in Q4 2021. The ECB decides on the issue at next week’s policy meeting (September 9) which includes updated (and higher) growth and inflation forecasts. The German 10-yr yield from a technical point of view bounced into -0.35% resistance which is 38% retracement on the May/August yield decline. Post-ADP yield developments hurt the dollar with EUR/USD currently changing hands near yesterday’s high of 1.1845. Underlying dynamics shifted from euro strength to dollar weakness though. The trade-weighted dollar is testing 92.47/41 support again. Losing that level would obviously accelerate the EUR/USD rebound with the 1.1909 July top being the next reference. The US ISM’s starting with today’s manufacturing measure are next reference for the (US) trading dynamics.
Turkish GDP grew by 21.7% y/y in Q2. While the quarter-on-quarter figure wasn’t necessarily bad (0.9%), it does reveal the record yearly growth reading is largely the result of base effects. The Turkish Statistical Office said household consumption, which accounts for some two-thirds of the economy, was the main driver of growth, rebounding 22.9% compared to the same quarter last year. Exports rose 59.9% y/y and imports 19.2%, resulting in a positive net export contribution. Companies spurred investments, with fixed capital formation rising by 20.3%. In a separate report, the Turkish manufacturing PMI marginally increased, from 54 to 54.1. The decent-to-strong data do not help the Turkish lira today. EUR/TRY stabilizes around 9.83. Perhaps some nervousness in the run-up to Friday’s CPI reading is at play. July inflation creeped higher to 18.95%, leaving the real central bank policy rate barely positive.
The European Securities and Markets Authority (ESMA) in its latest bi-annual report on financial markets trends said valuations in the EU are now at and even ahead of pre-pandemic levels and thus possibly face significant corrections. ESMA found that corporate bonds are far above levels seen before the crisis and reported increased risk taking in stocks and crypto assets. It said that the current market trends would have to show resilience over an extended period of time before it can make a more positive risk assessment.