• European equities suffer more losses as the stock market correction continues. Main indices lose up to 1%. US stock markets open on a weak footing as well, dropping around 0.75%.
  • US consumer prices barely rose in October (0.1% M/M) as the boost to gasoline prices from hurricane-related disruptions to Gulf Coast oil refineries was unwound, but rising rents and healthcare costs pointed to a gradual buildup of underlying inflation (0.2% M/M).
  • US retail sales rose more than expected in October (0.2% M/M). The market had expected no change after retail sales clocked a blistering 1.9% M/M rise in September when people replaced vehicles and items destroyed by hurricane Harvey and Irma. Control retail sales, which exclude volatile items, rose 0.3% from September.
  • The UK labor market showed signs of slowing in the third quarter as the number of people in work fell for the first time in almost a year even as unemployment held at a 42-yr low. There was no sign of respite for UK wage earners though who face a squeeze on incomes from high inflation, after pay growth held steady in the latest three months
  • BoE governor Broadbent said markets have placed too much emphasis on the idea that interest rates need to be kept low in the face of Brexit uncertainty. "Even as inflation rose, and the rate of unemployment fell further, interest-rate markets continued to under-weight the possibility that bank rate might actually go up this year," he said.
  • Waiting too long to halt monetary policy stimulus could be disruptive, ECB Hansson said, adding that a more supportive euro zone economy justified a shift in the central bank’s policies.
  • Greece invited holders of about €30 bn euros in its debt to swap 20 small outstanding bonds for 5 new benchmark ones. The plan is to boost market liquidity before Greece emerges from bailouts in August 2018. The eligible papers are 20 bonds that were issued in 2012 in a voluntary scheme where private bondholders took a 53.5% haircut.
  • Signs that Sweden’s red-hot housing market is cooling off are unlikely to impact monetary policy now, but may make the central bank’s path toward normalizing rates trickier, Swedish Riksbank Governor Ingves said.


Bull flattening yield curves

Global core bonds gained ground today, bull flattening the yield curves. The move occurred mainly in Asian and European dealings on the back of deteriorating risk sentiment on stock markets, re-establishing last week’s lost correlations. A disappointing Bund auction couldn’t change the tide. Brent crude stabilized after yesterday’s sell-off, but the picture remains fragile. The upleg in core bonds petered out ahead of key US eco data. Both CPI inflation and retail sales moderated from last month’s levels, but printed near consensus. Their impact on core bond markets was negligible.

At the time of writing, US yield changes range between flat and -3.7 bps (30-yr). The German yield curve drops up to 4 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are broadly unchanged with Portugal (+5 bps), Greece (+4 bps) and Spain (+3 bps) underperforming. Portuguese bonds fell prey to some profit taking following the impressive rally of late. Investors anticipate a second rating upgrade into investment grade by Fitch in December (current rating BB+ with positive outlook).

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The German Finanzagentur held a 10-yr Bund auction (€3 bn 0.5% Aug2027). Demand was weak with total bids amounting only to €2.97 bn, below the amount on offer and below the €3.68 bn average at the previous 4 Bund auctions. The Bundesbank retained €0.52bn for secondary market operations, resulting in an official bid cover of 1.2 (real bid cover 0.99). The auction had no tail.


US data not strong enough to reverse USD sell-off

The euro rally/USD sell-off continued today. There was again no high profile story to explain the move. Overall risk sentiment again weighed more on the dollar than on the euro. EUR/USD (temporary) cleared the 1.1837 post-ECB top. US retail sales and CPI were marginally better than expected, but didn’t help the dollar much. EUR/USD trades in the 1.1820 area. USD/JPY is changing hands around 112.75.

Profit taking on risky assets continued overnight. Japan Q3 growth was marginally below consensus at 1.4% Q/Qa, with especially private consumption being a drag on growth. USD/JPY drifted further south in the 113 big figure (yen strengthened). The decline in core yields and risk-off sentiment outweighed Japanese domestic data, as usual. EUR/USD (1.1790 area) maintained yesterday’s gains.

There were no data with market moving potential in EMU. The euro short squeeze simply resumed at the start of the European trading session, almost exactly the same way as was the case yesterday morning. EUR/USD set a new post-ECB top north of 1.1837. Again, we didn’t see a specific trigger. The move was partially euro strength, but growing risk off sentiment also kept the dollar in the defensive. In the afternoon, the focus turned to the ‘key’ US CPI and retail sales data. Except for the early month data (ISM, payrolls) those data are the last important input for the December 13 Fed decision. Unfortunately (from a market point of view), the retail sales and the CPI were very close to expectations. If anything, they were marginally stronger than expected. Still, the dollar lost a few more ticks immediately after the publication of the data, but the USD decline finally petered out. The USD currency is looking for an intraday bottom. USD/JPY trades in the 112.75 area (from an intraday low near 112.50 and despite ongoing risk-off). EUR/USD jumped to the 1.1860 area, but a test of the next key resistance (1.1880) didn’t occur. EUR/USD trades currently again in the 1.1820 area. We still consider the USD sell-off overdone (especially against the euro), but for now there is no trigger to turn the established trend. So, no good reasons to try to catch the falling (USD-)knife yet.

EUR/GBP tests 0.90

UK labour market data showed a mixed picture today. Wage growth (2.2% Y/Y) was marginally higher than expected, but remains low. The unemployment rate was stable as expected at 4.3%. Employment growth in the three months to September unexpectedly declined by 14k. A 52K rise was expected. The unexpected decline in employment confirms the recent slowdown in the UK economy. Sterling lost some further ground after the publication of the data. EUR/GBP jumped temporary north of 0.90, but the gain could not be sustained. The pair trades currently in the 0.8985 area. Cable spiked to the 1.3135/40 area, but trades currently again around 1.3165. The price moves in the sterling cross rates were also perturbed by the intraday price swings in the dollar and the euro.


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