Markets
Global core bonds traded mixed yesterday with US Treasuries edging lower and German Bunds closing marginally higher. Second day in a row that European and US equities mirrored each other. European indices closed yesterday’s session with (limited) losses after disappointing Q3 GDP results and a fall in economic confidence. Italy’s data showed stagnation in growth, pushing Italian BTP futures back south. The spread over Germany increased again to well above 300 bps. US equities opened higher to enter a volatile day of trading. Only in the last trading hours, US indices rallied higher to close in green (+1.5%-2.0%). US Treasuries edged gradually lower throughout the day. The US yield curve shifted 3.4 bps (2-yr) to 3.8 bps (10-yr) higher. The German yield curve bull flattened with yields falling 0.1 bp (2-yr) to 1.5 bps (30-yr). The dollar took the upper hand on FX markets with the trade weighted dollar testing the 2018 high. EUR/USD settled in the lower 1.13-1.14 area. EUR/GBP edged somewhat higher in yesterday’s session but this was more related to sterling weakness. There was no brexit news to steer trading, leaving EUR/GBP at 0.892.
Asian stock markets reflect WS’s optimism despite disappointing Chinese/Japanese eco data. Especially Chinese PMI’s send a worrying signal, with the manufacturing index just holding above the 50 boom/bust mark. The US Note future struggles and the dollar keeps going. The greenback manages gains in both a risk-on and risk-off context the past couple of days The trade weighted dollar sets a new 2018 high, north of 97. EUR/USD slips below 1.1350, grinding towards the 1.1301 2018 low. The USD/JPY rally brings the pair above 113 with lower inflation forecast by the BoJ adding to yen weakness. EUR/GBP holds above 0.89 going into tomorrow’s BoE meeting.
Today’s eco calendar contains EMU unemployment rate, EMU CPI, US ADP employment and Chicago PMI. The unemployment rate is expected to stabilize at 8.1%, the lowest level since the end of 2008. Inflation is expected to accelerate from 2.1% Y/Y to 2.2% Y/Y for the headline reading and from 0.9% Y/Y to 1.1% Y/Y for the core. Spanish, German and Belgian inflation readings suggest such an increase is likely. It would strengthen ECB president Draghi’s recent comments that he expect a vigorous pick-up in core inflation because of wage growth, the economic expansion and the ECB’s easy monetary policy. This scenario might weigh on the Bund especially if European equities build on yesterday’s WS strength. It could give the euro some reprieve, but ongoing dollar strength and nearby support suggest at least at test of the 1.1301 mark. US eco data are interesting, but probably no market movers ahead of tomorrow’s ISM and Friday’s payrolls.
News Headlines
The Indian government wants to enact a never-used provision in the Reserve Bank of India act which would allow them to consult and give instructions for RBI governor to act on certain issues “in the public interest”. The central bank and government are at odds on issues like the handling of weak state-run lenders, tight liquidity and resolving bad loans at power generators. USD/INR rises back above 74, closing in on the 74.48 all time high.
Chinese PMI’s disappointed. Both the manufacturing and services gauges declined more than forecast, respectively from 50.8 to 50.2 and from 54.9 to 53.9. The manufacturing PMI hit the lowest level since July 2016, confirming a broad decline in economic activity as the US trade war bites. Australian inflation fell back below the RBA’s 2%-3% target in Q3 (1.9% Y/Y from 2.1% Y/Y). The central bank’s trimmed mean CPI was unchanged at 1.8% Y/Y. Inflation readings will strengthen the central bank’s view that no policy action is needed within the next 12 months and could keep AUD/USD in the defensive. Japanese industrial production declined by 1.1% in September (vs -0.3% estimate).
The Bank of Japan kept its monetary policy unchanged, but downgraded inflation forecasts in its new quarterly outlook report. Inflation is expected to remain below the 2% target until at least early 2021
