Markets
It doesn’t happen that often but European (interest rate) markets set the tone for global trading yesterday. EMU August inflation (headline rising from 2.2 to 3.0%, core up 0.7% Y/Y to 1.6% Y/Y) printing higher than expected, caused some hawkish ECB members (Holzmann, Knot) to make their point that time has arrived for the ECB to scale back policy support. ECB growth and especially inflation forecasts might again be upwardly revised at next week’s meeting. It is still unsure how/when this will translate in slower ECB PEPP bond buying. However, with the little ECB policy normalization discounted, European yields extended recent bottoming. The German yield curve bear steepened with yields rising between 2.3 bp (2-y) and 6.1 bp (30-y). 10-y yield (-0.385%) tries to conquer the -0.40%/-0.38% resistance area. US yields followed the European trend from a distance. US data were mixed, with an acceleration in US house prices (cf infra) but a sharper than expected decline in consumer confidence. US yields rose between 0.8 bp (2-y) up to 3.6 bp (30-y), with higher real yields being the driver. The rise in LT interest rate differentials wasn’t enough for EUR/USD to confirm its break of the 1.1805 resistance. The pair closed only modestly higher at 1.1809. The TW USD index tested support in the 92.48 area but also closed little changed (92.63). A more fragile risk sentiment and the rise in US real yields maybe served as drivers for the USD resilience. The euro also slightly outperformed sterling, but failed to regain the 0.86 barrier (close 0.8585).
Asian equities this morning are well bid despite higher core yields and yesterday’s pause in the US equity rally. Even so, the dollar retains the benefit of the doubt (DXY 92.77; USD/JPY 110.25; EUR/USD 1.18). After poor official PMI’s earlier this week, the China Caixin manufacturing PMI also dropped into contraction territory (49.2 from 50.3). The yuan remains slightly in the defensive near USD/CNY 6.463.
At the first day of the month, the focus as usual turns to the US manufacturing ISM and ADP job growth. For the ISM a modest decline from 59.5 to 58.5 is expected. ADP job growth is expected to pick up from 330k to 638k. Recent data/survey evidence indicated that the peak in US growth momentum might be behind us, but prices pressures remain elevated. We see risks for a downside surprise. On the other hand, labour date might remain strong. On the European bond markets we look out whether the German 10-y yield will regain the -0.38% area and whether 10-y euro swaps (-0.035%) can return into positive territory. ECB’s de Guindos in an interview published this morning at least confirms his positive assessment on the EMU economy going into next week’s ECB meeting. Yesterday intraday EUR/USD performance was slightly disappointing. The pair probably needs weaker than expected data to resume its rebound to the 1.1909 next target.
News headlines
The US S&P Case Shiller house price index showed house prices rising at their fastest y/y pace since the start of the data more than 30 years ago. The yearly growth figure was 19.08% from 17.14% in May, beating 18.6% consensus. Low mortgage rates, surging lumber prices, labour and material shortages and a tight inventory (Covid-preference to move to the suburbs) all added to the mismatch between strong demand and a lack of supply. The WSJ reports that the US government might today announce measures to tackle the supply side of the story. Changes include allowing mortgage giants Fannie and Freddie Mac to invest more of their resources into rental housing, to encourage affordable housing production and to increase the financing available for manufactured homes. First-time home buyers and philanthropies will be given a chance to buy distressed properties insured by the Federal Housing Administration.
Australian GDP rose faster than expected in Q2 (0.7% Q/Q vs 0.4% Q/Q) following an upwardly revised 1.9% Q/Q in Q1. Household consumption and government spending were the main contributors to growth with net exports being a drag. Q2 data paint a misleading picture on the current situation of the Australian economy as the delta Covid-variant outbreak forced several states back into tight lockdowns as the government tries to fire up its vaccination campaign. The Aussie dollar is unmoved by the data, trading around 0.7310 against the US dollar.
