Markets
Core bonds slipped yesterday. US yields pushed between 2.5 and 8.5 bps higher in a steepening move. German yields followed that trend closely by adding 2.6-7.1 bps. The yield surge came after the US Treasury boosted its quarterly borrowing estimate for July through September to $1000bn, well up from the $733bn it projected in May. Reasons for the upward revision include a higher planned cash balance as well as a deteriorating budget deficit. The latter is by the way one of the key elements in Fitch’s US downgrade (see below). Economic data included the US July manufacturing ISM and JOLTS June report. Both undershot expectations but the impact on markets was both temporary and negligible. As yields shot up, equities dropped. A strong July month likely also caused some vertigo amongst investors amid a flurry of mixed-to-disappointing earnings. European stocks dropped 1.4% (EuroStoxx50). Wall Street finished between 0.2% higher (DJI) and 0.4% lower (Nasdaq). A more or less equal performance by USTs and Bunds kept EUR/USD nicely balanced. The pair closed marginally lower just south of 1.10. Sterling fell, bringing EUR/GBP close to the 0.86 barrier again. Japan’s yen extended a decline. USD/JPY moved higher to 142.29 while EUR/JPY gets within striking distance of its previous multi-year high.
Fitch’s decision unnerves Asian-Pacific traders. In an echo to 2011, risk assets drop but ironically USTs show resilience. US yields gapped lower at the open before paring some of the losses, in longer tenors especially. Japanese stocks underperform with the Nikkei losing 2.5%. In currency markets, the euro is topping the G10 leaderboard, eking out a small gain against the dollar as well. The kiwi dollar faces selling pressure from a labour market report showing wage pressures easing. The remainder of the economic calendar is pretty meagre with only the US unofficial ADP job report scheduled for release. Consensus expects a solid 190k employment growth in July after a bumper June (+497k). With the payrolls due on Friday and Fitch’s minor bombshell, the report is probably of second-tier importance for today, barring a huge surprise in the outcome. Short-term yields both in Europe and the US remain close to their cycle highs. We look out whether the US 10-y maintains the 4% barrier it recovered yesterday. Germany’s 10-y is sniffing at the 2.55% resistance. EUR/USD is in technically neutral area. A break below 1.0865 turns the picture dollar positive but probably requires remaining US data (from ADP and services ISM over the payrolls to CPI next week) to be (very) strong.
News and views
New Zealand employment grew a more-than-expected 1% q/q in Q2 of this year. The slight deceleration from an upwardly revised 1.1% in Q1 brings employment 4% higher compared to the same period last year and the level is higher than the central bank projected in May. However, labour supply is rising faster than demand. The participation rate rose to a record high of 72.4%, pushing up the unemployment rate from 3.4% to 3.6%. While wages still rise a well above-average 1.9% q/q, the aforementioned dynamics are expected to dampen wage growth going forward. Wages climbed 4.3% y/y, slightly below the RBNZ’s 4.4% forecast and slowing from the 4.5% in Q1, which was the highest since the data were first published in 1993. The central bank in May signaled the end of its tightening cycle with the policy rate at 5.5%. Market odds prior to today’s labour market report were nevertheless slightly in favour of one more hike (56%) as, amongst others, (domestic) inflation is still much too high. That has now turned (44%). The kiwi dollar loses territory against the greenback. NZD/USD drops towards 0.61.
Credit rating agency Fitch removed the US top AAA-rating by lowering it one level to AA+. It had warned to do so back in May, when Congress bickering over raising the debt limit brought the country only weeks away from defaulting. That was ultimately averted, but Fitch said that the repeated debt-limit clashes and eleventh-hour resolutions caused “erosion of governance”. In addition, the agency is concerned about the US’s swelling fiscal deficits with the situation expected to deteriorate over the next three years at a time government debt is already high and growing. Fitch’s decision is an echo to S&P’s downgrade in 2011, which also followed a clash over the debt limit. Moody’s still gives the US it’s top Aaa grade.
