- European equity indices show gains of approximately 0.5% as the risk rally continues. The FTSE 100 underperforms as the strengthening of sterling weighs. US equities also start the session with modest gains.
- UK inflation is on the rise again, accelerating more than forecast in August after the biggest surge in clothes prices in almost three decades. The jump to 2.9% from 2.6% in July puts the spotlight squarely back on one of the most prominent economic repercussions of the Brexit vote in 2016.
- The 1% cap on pay rises for UK public sector workers is to be scrapped after the government agreed to a 1.7% annual pay rise for prison officers and an effective 2% rise for police officers for the current year.
- US NFIB small business optimism slightly increased from 105.2 to 105.3 in August, while consensus expected a small decline to 104.8. The outcome was too close to consensus to bother markets. The indicator remains near multiyear highs.
- OPEC crude oil production fell last month for the first time since April, in a boost to the cartel’s beleaguered efforts to reduce output and rein in the global supply glut. The cartel has revised higher its global oil demand growth forecasts for this year and next as consumption in the second quarter of 2017 surpassed expectations.
- The German economy is set to grow by more than 2% this year adjusted for calendar effects, which would be the strongest rate in six years, the BDI industry association said as it lifted its growth forecast for Europe’s biggest economy.
- Underlying inflation in Sweden hit the central bank’s 2% target for the second straight month in August, supporting arguments that the time is right to start tightening monetary policy amid signs of an overheating economy. EUR/SEK declined from 9.59 towards 9.52.
Rates
Repositioning goes on
Global core bonds extended yesterday’s decline, but the pace slowed. Risk sentiment on stock markets remained positive. Stronger than expected, but second tier, eco data (UK CPI, see FX, and US NFIB small business optimism) and EMU/US supply also weighed on core bonds. The confirmation of yesterday’s technical breaks of US yields back above previous support levels (5-yr: 1.7%, 10-yr: 2.1%, 30-yr 2.68%) suggests that the downtrend since the start of the Summer is over and that we’ve entered a consolidation phase ahead of next week’s FOMC meeting. Markets are still too dovish positioned according to us with US rate markets not even discounting a complete rate hike by the end of 2018.
At the time of writing, US yields increase by 1.2 bps (2-yr) to 2.8 bps (5-yr). Changes on the German yield curve vary between +1.7 bps (2-yr) and +3.6 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrow up to 3 bps.
The Dutch debt agency tapped the on the run 10-yr DSL (€2.2B 0.75% Jul2027). The amount sold was below the maximum targeted €3B, but that’s almost every time the case at Dutch auctions. The treasury didn’t disclose the bid cover. Austria launched two new bonds via syndication. A new 5-yr RAGB (Sep2022) was priced to yield MS -36 bps, tighter than guidance in the MS -35 bps area. Austria also managed to raise €1B with a centennial bond which drew in excess of €11B demand. The 100-yr RAGB printed at MS +50 bps, at the lower end of the MS+50/55 bps guidance. The US Treasury continues its refinancing operation tonight with a $20B 10-yr Note auction. The WI trades currently around 2.16%.
Currencies
Dollar extends rebound
Today, the risk rebound continued. Core yields rose further. The dollar remained the major beneficiary among the major currencies. USD/JPY outperformed and is testing the 110 barrier. The progress of the dollar against the euro remains more modest with EUR/USD trading in the 1.1940 area. There were few data to support the move, but that might change later this week with the US price data scheduled for release tomorrow and on Thursday.
The risk rebound continued in Asia this morning. Japanese equities outperformed on yesterday’s decline of the yen. The dollar maintained yesterday’s gains against the euro and the yen, but there was no additional progress yet. The UN security council approved a watered-down US proposal on additional sanctions against North Korea. Markets pondered the chances on a possible reaction of North Korea.
The risk rebound was also extended in Europe. There were no important data in EMU. Core German and US bond yields rose more or less in lockstep. If anything, German yields rose slightly more than US ones, but this was probably a simple catching up move on yesterday’s rise in the US. Whatever, the dollar remained well bid across the board. EUR/USD hovered toward the lower barrier of the 1.1950/80 range. USD/JPY drifted higher to the 109.75 area.
The dollar comeback gained some additional momentum going into the start of the US session. The NFIB small business confidence rose slightly from 105.2 to 105.3. A limited setback to 104.8 was expected. The report was no major factor for trading, but it helped to sustain a positive sentiment both for the dollar and for risky assets. The Trump administration preparing a new campaign to win support for a substantial tax reduction was maybe also a minor USD supportive. However, for now, we consider current move in the first place an unwinding of ‘excessive’ USD shorts. EUR/USD trades currently in the 1.1940 area. USD/JPY is testing the 110 mark.
To conclude: the risk-on repositioning continued and the dollar still profits slightly more than the euro (and evidently also the yen). Tomorrow and on Thursday, the focus will shift to the US price data. Interesting to see whether they are good enough to reinforce the USD positive momentum.
Sterling rebound accelerates as inflations jumps higher
Of late, sterling succeeded a gradual but sustained rebound especially against the euro. There was no obvious driver. UK eco data were mixed of late. There was also very little progress in the Brexit negotiations. Today, the eco data came again in the spotlight. UK August inflation rose much more than expected from 2.6% Y/Y to 2.9%, matching the highest level in 5 year. The consensus expected a rise to 2.8%. Core inflation was also above consensus at 2.7% Y/Y. At the August policy meeting the BoE kept a wait-and-see bias even as it was aware that inflation could reach 3.0%. Even so, the current uptick will probably force the BoE to give more weight to inflation in its policy assessment, even as growth slows and as Brexit uncertainty persists. We don’t expect the BoE already to change course on Thursday, but chances on a rate hike will rise of the August upward surprise will be confirmed further down the road. The sterling rebound accelerated after the CPI release. EUR/GBP dropped temporary below the 0.90 mark and trades currently around 0.9010. Cable set a minor new top at around 1.3288, even as the dollar was well bid across the board.
