Markets
Markets continued digesting this week’s mainly political event risk coming from the US and France. The US yield curve bull steepened with yields around 5 bps lower at the front end of the curve and broadly flat at the very long end. Apart from Fed Powell’s dovish pivot in Jackson Hole, markets start pricing the event risk in which US President Trump succeeds in ousting Fed governor Cook, setting a dangerous precedent and winning him a majority on the Washington Fed Board. The overarching aim is to keep policy rates low to help fund bloating public finances. In light of recent events, we wonder whether tomorrow’s PCE deflators (July), given risks for an upward surprise, will even matter to markets. The dies are cast for September (25 bps rate cut) it seems with markets starting to err on the side of consecutive moves lower. Next week’s payrolls report will be scrutinized for any signs of weakness. The dollar suffered a backlash during US trading hours on Treasuries’ outperformance, erasing earlier gains on the back of a weak euro: EUR/USD went back and forth between roughly 1.1640 and 1.1580. Underperformance of French OAT’s pushed the 10-yr French swap spread to 86 bps (88 bps YtD high early January) and weighs on the single currency. The spread added 10 bps since PM Bayrou announced the doomed-to-lose confidence vote over fiscal plans spelled out in July. New parliamentary elections are becoming ever more likely, but possibly unable to resolve the current paralysis in French politics while huge budget deficits and the spiraling debt ratio call for action. French OAT’s are now even converging to Italian BTP’s (10-yr BTP swap spread at 91 bps).
Revisions to the second quarter US GDP number and weekly jobless claims feature today’s agenda, but won’t impact markets. Accounts of the ECB’s July policy meeting could further close the door for another rate cut later this year. The US Treasury end its refinancing operation with a $44bn 7-yr Note sale. Yesterday’s 5-yr sale tailed slightly after a strong 2-yr deal on Tuesday. Lingering themes exploited above will continue to set the tone for both risk sentiment and overall trading. AI-bellwether Nvidia published good results after market close yesterday. It’s shares currently correct 2.75% lower in after-market trading. This contained reaction suggests limited spill-over to general sentiment.
News & Views
The Bank of Korea as expected left its policy rate unchanged for a second consecutive meeting this morning at 2.5%. The decision was taken by a 6-1 vote, with one member dissenting in favour of 25 bps rate cut. Regarding domestic economic growth, the BoK indicates that growth has improved due to a recovery in consumption and due to a better than expected increase in exports. Demand is expected to support a modest recovery. Exports might gradually slow due to the impact of US tariffs. The BoK upwardly revised its growth outlook for this year to 0.9% from 0.8%. The outlook for next year was left unchanged at 1.6%. CPI inflation was 2.1% in July and core inflation 2%. CPI inflation is expected at 2% this year. Overall and core CPI are seen at 1.9% next year, slightly up from the previous forecast of 1.8%. The Board will maintain its rate cut stance with governor Rhee saying that 5 of the 6 members are open to a rate cut in the next three months. At the same time, the BoK further assesses financial stability issues related to the housing price appreciation in the Seoul area and household debt growth, even as those issues have moderated of late. The won this morning gained modestly to USD/KRW 1387, but holds its recent consolidation pattern.
The Dutch caretaker government of PM Dick Schoof survived a no-confidence vote in Parliament yesterday. Only two smaller parties supported the no-confidence motion. However, even the after this vote the political deadlock in the country persists. The caretaker government has the support of 32 of the 150 seats in Parliament. In this respect, the cabinet needs relies on parliament on a case by case basis in the upcoming period toward snap elections scheduled for October 29. However, even after those elections, it might still be complicated to form a new government due to political fragmentation. For now, there was only a limited rise in the credit spread of the Netherlands over Germany (currently 19 bps).
