Markets
US Treasuries on Friday rallied after the important Employment Cost Index rose a little less than expected in the previous quarter. Combined with the core PCE deflator missing consensus by an inch and a downward revision to the U. of Michigan consumer sentiment, yields moved 2.9 to 6.4 bps lower with the front end of the curve outperforming. German yields gapped higher at the open in catch-up move with the US the day before. But its 2-y yield in the end lost more than 4 bps after July CPI in several euro area member states including France and Germany was a tiny – as in 0.1 ppt – fraction slower than expected. Markets also disregarded Spain’s notable exception. Markets expect monetary tightening to be at or close to an end. Combined with not too shabby growth figures, especially in France, the idea of a soft landing scenario gains further traction. Equities were well supported against this background (+1.9% Nasdaq, 0.4% EuroStoxx50). This also provided the euro with an upper hand over the dollar. EUR/USD rebounded intraday from around 1.095 to go into the weekend above 1.10. DXY’s test of 102 was quickly over. The Japanese yen fully (and more) wiped out gains on the BoJ rumours on Thursday and the actual decision on Friday. USD/JPY closed at 141.16, EUR/JPY surged back above 155.
Stocks rise in Asian-Pacific trading as well. China is no exception, even as PMI data this morning showed the (services) economy losing further momentum (see below). Hope continues to linger that authorities in the country will announce some concrete form of consumption support through the likes of cash subsidies. China did release a wideranging policy document this morning but it is mainly targeted towards improving the supply of goods rather than demand. In Japan, the BoJ’s unscheduled bond buying operation draws attention (cf. infra). Yields in the country rally further, especially at the long tenors that are outside the central bank’s scope (30-y: +10.9 bps). The yen does not profit whatsoever though. The US dollar trades with a minor strengthening bias. Core bonds slip at the start of the new week and going into an interesting economic calendar today. In the US we’ll be watching the SLOOS, the American equivalent to the ECB’s Bank Lending Survey. Powell at the Fed meeting last week already said that their tightening campaign had indeed further curbed credit demand. Q2 GDP growth and July inflation numbers are scheduled for release in the euro area. The European economy is expected to grow 0.2% after stagnating in Q1. Risks, if any, are tilted slightly to the upside given France’s and Ireland’s strong numbers. Inflation is expected to have declined by 0.1% m/m with some marginal risks to the downside, taking into account national readings last week. Core inflation is the one critical for markets and the ECB though with especially services inflation to remain sticky as German base effects (cheap transport tickets in June-August last year) kick in. This should keep the euro and core/German bond yields well supported. Important events for the remainder of the week include US ISM’s, payrolls and central bank meetings in Australia, Czechia and the UK.
News and views
China’s economy started the third quarter on a softer footing. The composite PMI eased from 52.3 to 51.1 in July. The decline was driven by a further and bigger-than-expected slowdown in the services sector (to 51.5 from 53.2). New orders fell more than last month, backlogs are being reduced at a fast pace and the sector is laying off more people as well. The manufacturing offers a glimmer of hope though, with the PMI unexpectedly recovering slightly to 49.3 amid a less sharp demand drop and improving business activity expectations. It suggests the battered sector may be close to or even recovering from a bottom. China’s yuan is under marginal selling pressure this morning with USD/CNY moving to 7.148.
The Bank of Japan held an unscheduled bond buying operation this morning. It said it would buy JPY 300bn of 5 to 10-year notes at market yields. The move follows the central bank’s announcement of a more flexible approach in its yield curve programme which caps the 10-y yield at 0.5%. Combined with the BoJ raising the rate on its fixed-rate bond buying operations, the new cap in practice is set at 1%. Yields on 10-y JGB’s surged to a nine-year high on Friday but clearly at a pace that’s judged too fast by the BoJ. The 10-y yield this morning moved beyond 0.6% for the first time since 2014 before paring, yet only temporarily, some gains on the BoJ news. The Japanese yen loses still. USD/JPY is nearing the 142 barrier.
. New orders fell more than last month, backlogs are being reduced at a fast pace and the sector is laying off more people as well. The manufacturing offers a glimmer of hope though, with the PMI unexpectedly recovering slightly to 49.3 amid a less sharp demand drop and improving business activity expectations. It suggests the battered sector may be close to or even recovering from a bottom. China’s yuan is under marginal selling pressure this morning with USD/CNY moving to 7.148.){kind=link}