Markets
Dovish Fed and head of ECB nominees inspired an early move higher in both the 10-yr T Note and Bund futures. The upleg reversed at the start of European dealings though. Yields returned from intraday lows, supported by slightly better than expected (final) services and composite EMU PMI’s. A poor ADP reading (102k vs. 140k expected although with a 14k upward revision for May) suggests caution for Friday’s official payrolls but markets shrugged. It might also mean the recent decline in yields has gone far enough for investors while adapting positions having the 4th of July US holiday in mind. Still, the German yield curve flattened as yields change from flat (2-yr) to -1.3 bps (10-yr) and -3.7 bps (30-yr). The European periphery again profits strongly from yield searchers as spreads narrow 12 bps in Italy and 14 bps in Greece, bringing the total to about -40 bps in just three days! The US yield curve eventually didn’t shift materially, with the 10-yr yield slipping 1 bp and other maturities staying unchanged.
EUR/USD touched a minor correction low in the 1.1270 area this morning. The euro traded with a slightly negative bias as the new ECB Chair, Christine Lagarde was expected to continued Draghi’s policy of ample policy accommodation. Still, EUR/USD soon found a bottom as the EMU services PMI’s were slightly better than expected. EUR/USD returned to the 1.1280/1.1300 area. Italy avoids a disciplinary EC procedure on its budget. Italian spreads narrowed further, but this European risk-on move again hardly helped the euro. Early in US dealings, the ADP private job growth misses the consensus for a second month in an row. The impact on the dollar remained close to non-existent. The jobless claims and the US May trade deficit were also too close to expectations to give any directional guidance for USD trading. Investors are counting down to the US non-Manufacturing ISM. EUR/USD is currently trading in the 1.1290/1.1300 area. USD/JPY (107.75 area) is rebounding off the intraday lows as sentiment on risk remains constructive.
Today, the UK economic eco news turned further negative. In the post-Brexit era, the UK services sector was an important stronghold for the UK economy, but the June services PMI (50.2) suggests that growth in the sector came almost to a standstill. With measures of the manufacturing and the construction sector printing below the 50 boom-or-bust level earlier this week, the UK composite PMI (49.7) pointed that overall activity in the economy is at the brink of moving in contraction territory, too. Today’s poor eco data and persistent uncertainty on the Brexit, make investors conclude that the BoE will be forced to make a U-turn and prepare for a rate cut rather than a rate hike. EUR/GBP again came with reach of the 0.90 barrier even as the euro is in rather poor shape, too. No break of the 0.90 barrier occurred, but any further negative (eco or political) news might finally do the job.
News Headlines
The European Commission is likely to refrain from the excessive debt procedure against Italy after Rome committed to limit it’s 2019 deficit to 2.04%. It has passed a law earlier this week that would set aside future to keep the deficit in line with EU limits.
The Swedish Riksbank kept rates stable at today’s meeting and still assumes a rate hike by the end of this year or early next year is required. The central bank acknowledges global growth risks but thinks the impact on its economy will remain limited (little changed forecasts). The Swedish krona advanced.
