Markets
A stuffed eco calendar was poised to trigger at least some volatility on markets today but quite the contrary happened. EMU growth as expected decelerated to 0.2% QoQ, as did July (core) inflation. The ECB sees its case for additional stimulus strengthened but markets have been anticipating that already for some time. As a result, the German Bund added only small gains. The yield curve bull flattens with changes varying from -1 bp (2-yr) to -1.7 bps (30-yr). Peripheral spreads are marginally narrowing, except for Italy (stable) as growth in the third largest EMU economy stalled in Q2. Moves in UST’s were even more subdued. Yields lose 1 bp at the short end of the curve and that’s that. Investors chose to stay sidelined ahead of the crucial Fed meeting tonight. However, we don’t expect aggressive repositioning during and after Powell’s press conference either. His task will be to sooth markets who have been running ahead of the Fed quite strongly. The Fed chair will do so by referring to a plethora of risks and reaffirm the central bank’s commitment to act “as appropriate” when needed, in effect setting the stage for another rate cut possibly later this year. The Fed could strike a cautious tone regarding monetary policy further out in time, awaiting more guidance from the data and as risks develop. Markets should indeed find comfort in such a wait-and-see but ready-to-act approach.
Trading on global (FX) markets developed with some hesitancy today as investors are looking out for this evening’s Fed policy decision. EUR/USD gradually drifted off the intraday top levels (1.1160 area) reached at the start of European dealings. EMU Q2 GDP growth (0.2% Q/Q) was sluggish but as expected. EMU July inflation also drifted further away from the 2.0% ECB inflation target (0.9 Y/Y core; 1.1% headline). In line with recent price action, the data hardly affected the intraday dynamics for EUR/USD trading. The outcome of the US China trade, while mildly constructive, also had little impact on the dollar. The US ADP labour report (156 000 additional private jobs) was very close to expectations and didn’t disturb the countdown to this evening’s Fed policy decision.
The Fed is expected to cut its policy rate by 0.25 bps. USD traders will keep a close eye at the Fed press conference. The degree of perceived Fed softness/preparedness to start a more protracted easing cycle will decide whether or not the dollar will be able to break key resistance against the euro (EUR/USD 1.11 area) or on a trade-weighted basis (DXY 98.35 area).
Sterling entered calmer waters today. UK PM Boris Johnson visited Northern Ireland and discussed the key topic of the Irish backstop with representatives of the pro-British DUP party. However, there is no indication that it brought new insights on how the Irish border issue can be resolved. The UK government also didn’t downplay its hard stance on Brexit as advocated earlier this week. So, current calm in sterling selling might be short-lived. EUR/GBP is trading in the mid 0.91 area. Cable is changing hands in the upper part of the 1.21 big figure. Tomorrow, the BoE will hold a policy decision and published a new inflation report. Markets will be keen to hear the BoE’s assessment in a context where sterling is declining fast, causing upward inflation risk. At the same time, the UK economy probably can use some (monetary) help as uncertainty on a potential disorderly Brexit is growing. Interesting to see how the BoE will navigate through these potentially contradicting issues.
News Headlines
Monthly Canadian GDP figures came in a little stronger than expected in May. Growth decelerated to 0.2% MoM (down from 0.3% in April) but beat a 0.1% forecast. Growth stranded at 1.4% on a yearly basis vs. an upwardly revised 1.6% in April and 1.3% expected. The loonie advanced to USD/CAD 1.312.
