Markets
Global core bonds tread water today with German Bunds marginally outperforming US Treasuries during a rather dull trading session. Neither EMU June inflation (1.20% YoY) nor US May PCE (1.50% YoY) were able to trigger a notable market reaction, despite core measures (resp. 1.1%, 1.60% YoY) printing slightly higher than expected. Today’s narrow range trading clearly shows markets are sidelined for tomorrow’s closely watched Trump-Xi meeting. President Trump said he’s preparing for ‘productive’ talks with his Chinese counterpart, in one breath adding however that he didn’t promise to hold off on new tariffs. US yields add no more than 1 to 1.5 bp across the curve. The German yield curve flattens with a small yield decline at the long end of the curve (30-yr: -1 bp) and other maturities unchanged. Peripheral spreads mostly narrow with Italy outperforming (-4 bps) as investors took heart from positive headlines related to the ongoing disciplinary procedure.
The story on global (FX) trading was similar to yesterday. Investors refrained from holding big directional positions ahead of key events expected to take place at the G20 in Osaka tomorrow. Order-driven trade prevailed. Last minute end of month positioning was also in play. EUR/USD jumped higher in the 1.13 big figure early in European dealings. We didn’t see any specific news. The pair filled offers in the high 1.13 area but a real test of 1.1400 again didn’t occur. EMU June inflation was marginally above consensus but as expected didn’t change expectations for ECB policy. The euro declined and the dollar captured a better bid going into the start of US dealings, but the move again didn’t go far. US May spending and income data were solid, but the price deflators were close to expectations. The dollar didn’t react, another indication that technical considerations prevailed for USD trading, rather than eco or other news. EUR/USD is trading in the 1.1380 area. USD/JPY hovers near 107.80. Regarding the G20 meeting, a constructive outcome of the Trump-Xi meeting tomorrow might be moderately positive for the dollar (higher US yields). Especially USD/JPY might profit. The impact for EUR/USD might be more neutral. At the same time, we will look out for comments from president Trump on the US FX policy/strength of the dollar.
EUR/GBP again touched a minor correction top just below the 0.90 level. However, this psychological barrier was still left intact. The move mirrored a similar rebound, but some sterling weakness was maybe also in play as Boris Johnson didn’t rule out suspending Parliament to keep the option of a no-deal Brexit open. Press articles indicated that Boris Johnson is preparing a (stimulating) budget including tax cuts to support the economy in case of a no-deal Brexit. Such fiscal support is in theory sterling supportive, but we doubt this consideration was in play for trading today. EUR/GBP is trading in the 0.8960 area.
News Headlines
The Belgian National Bank decided to raise the countercyclical buffer rate for credit risk exposure to 0.5% as the credit-to-GDP gap reached 2.1% in 2019Q1, exceeding the 2% threshold. The decision will become binding as from July 1st 2020 and is estimated to result in an additional capital buffer of approximately € 1 bn.
The OECD Secretary-General Gurria warned that central banks “have run out of ammunition”. He said that current very low interest rates will remain lower for longer, pointing out that is as much as central banks can do. Countries that have room to do so, should use fiscal policy to boost the economy.
