- European stock markets correct lower today with losses of up to 0.5%. US stock markets opened mixed with the Dow gaining some ground and the S&P and Nasdaq suffering small losses.
- Gertjan Vlieghe, one of the BoE’s nine-strong rate-setting committee, said in a speech today that the base rate may need to rise "as early as the coming months". Previously, he has defended the central bank’s programme of monetary stimulus.
- An improvised device was detonated on a London Underground train on Friday morning, injuring 22 people in what police say was a terrorist incident. Counter-terrorism officers took charge of the investigation and were seeking to establish who had planted the device on a packed commuter train during rush hour.
- An unexpected decline in August US retail sales and downward revisions to the prior two months mainly reflected weaker results at auto dealerships. Retail-control group sales, which are used to calculate GDP and exclude the categories of food services, auto dealers, building materials stores and gasoline stations, decreased 0.2% following a 0.6% advance
- US industrial production dropped unexpectedly by 0.9% M/M in August following an upwardly revised 0.4% M/M in July. Manufacturing production was down 0.3% M/M. The US empire manufacturing index declined less than forecast, from 25.2 to 24.4 (18 expected).
- There is a realistic chance of another Czech interest rate hike this year, partly due to an unexpectedly fast rise in wages, the central bank’s monetary department director Tomas Holub was quoted as saying.
- EMU wages grew at their fastest rate in two years in Q2, increasing the chances that the ECB will set out plans next month to rein in its economic stimulus. Hourly labour costs rose by 1.8% in the April-June period, from a revised 1.4% in Q1, its highest growth since the first quarter of 2016, Eurostat said.
- "It is time to take a decision now on scaling back our bond purchases at the beginning of next year," ECB Lautenschlaeger said. "We need to think about how to bring our unconventional measures to an end. We need to look ahead and discuss what the exit might look like."
Rates
Core bonds lose more ground despite weak US eco data
Global core lost more ground today despite disappointing US eco data (retail sales, industrial production). US Treasuries nevertheless outperformed German Bunds because of these data. Today’s session confirms that sentiment on core bond markets turned a corner compared to the Summer months. The main culprit for the decline in core bonds was BoE Vlieghe. He is by far the most dovish BoE-member, but in a speech he argued as well in favour of rate hike (in line with BoE communication yesterday). Both the Bund and the US Note future suffered a blow via the UK Gilt market (5-yr yield at one stage +12 bps). It makes the topic of policy normalisation in EMU and US back alive ahead of next week’s FOMC meeting. US eco data mainly disappointed (only empire manufacturing better than forecast) but offered only temporary relief for the US Note future. Hawkish comments by ECB Lautenschläger (see headlines) marginally weighted on the Bund as well.
At the time of writing, changes on the US yield curve range between +0.2 bps (30-yr) and +1.5 bps (5-yr). The German yield curve trades 0.7 bps (30-yr) to 3.1 bps (5-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrow up to 3 bps (Portugal).
Currencies
US data can’t help dollar find a solid bottom
The dollar couldn’t confirm tentative signs of a bottoming out process earlier this week. EUR/USD returned to the upper half of the 1.19 big figure. The move was reinforced by poor US retail sales and production data. USD/JPY (and EUR/JPY ) are in good shape, but this is mainly yen weakness as the Japanese currency suffers from higher US/EMU yields.
Overnight, North Korea launched a new missile over Japan. However, the multiple North Korean actions have diminishing impact on markets. Asian equity markets traded mixed, mostly even slightly stronger. USD/JPY spiked briefly below 110, but soon returned to the mid 110 area. The EUR/USD chart hardly showed any ripples.
There was no high profile eco news in Europe. European equities didn’t suffer from the North Korea missile launch, but there were also no sustained gains. At the same time, US and European bond yields still trended cautiously higher. Contrary to what was the case of late , the euro this time profited more than the dollar. ECB’s Lautenschlaeger said that it is now time to take a decision on scaling back QE. Her point of view is no surprise but it brought the ECB tapering story again in the spotlight. The hawkish comments from the UK were maybe also slightly more supportive for the euro than for the dollar. Whatever, EUR/USD returned to the mid 1.19 area going into the US session. The yen suffered quite heavily from higher US & EMU yields. USD/JPY jumped above 111. EUR/JPY even reached the highest level since end 2015.
The early morning US data were mixed. The US empire manufacturing remained strong, but August retail sales brought a big miss and a strong July report was downwardly revised. The August US production also declined sharply, but Harvey was to blame. The dollar lost some further ground, but the additional losses were modest given the substantial miss in the data . EUR/USD trades in the 1.1970 area. USD/JPY hovers around 110.85. Conclusion: There were tentative signs of a USD bottoming out prices earlier this week, but these are not yet confirmed. USD/JPY is testing the 111 resistance area but this is yen weakness rather than USD strength.
Sterling gets additional support as dove turns hawkish
Yesterday, sterling jumped sharply higher as the BoE minutes of the 13 September policy meeting revealed that a majority of MPC members expected that a gradual withdrawal of monetary stimulus is likely to be appropriate over the coming months in order for inflation to return sustainably to target. There were no eco data in the UK today. However, BoE’s Vlieghe, a notorious dove within the MPC, gave a speech in London. Remarkably Vlieghe also supported the call for a rate hike. He even suggested that the equilibrium UK interest rate may be rising. This hawkish turn of a BoE dove evidently triggered further GBP gains. EUR/GBP dropped temporary below 0.88 and trades currently at 0.8825. Cable (currently 1.3575) jumped north of 1.36, supported by USD softness, too.
