Markets
Sub-par US JOLTS job openings and consumer confidence yesterday triggered a sharp rally in US Treasuries, with markets only discounting a limited chance of a Fed September rate hike. However, the spill-over the EMU markets was modest after all. Today’s first national EMU CPI series at least illustrated that there was good reason for European bond investors to take a more guarded approach. German August HICP inflation slowed less than hoped for to 0.4% M/M and 6.4% (from 6.5%). Spanish HICP inflation reaccelerated after a very low July reading to 0.5% M/M and 2.4% (from -0.1% M/M and 2.1% Y/Y). The release was as expected, but core inflation also slowed less than expected from 6.2% to 6.1%. Inflation in Belgium in August printed in line with July at 0.76% M/M and 4.09 Y/Y. In line with the PMI’s, economic confidence from the European Commission declined further to 93.3 from 94.5, further complicating the ECB’s decision making process. Short-term European yields opened up to 7 bps higher after the first German regional CPI, but momentum ebbed later, especially after the US date releases. German yields currently only maintain limited gains between 1.5. bps (2-y) and 3.0 bps (10-y). Money markets still see an near 50/50 chance for a new 25 bps rate hike at the ECB at the 14 September meeting. In the US, ADP private job growth slowed lightly more than expected to 177k. Last month’s impressive 324k growth was revised even higher to 371k, suggesting a still healthy US job market this summer. US Q2 GDP growth (QoQa) was slightly downwardly revised to 2.1% from 2.4% as was the core PCE deflator (3.7% from 3.8%). While old news, US Treasuries a bit strangely gained traction after the report. In a continuation of yesterday’s steepening the US 2-y yield eases 5 bps. The 30-y trades little changed. Stubbornly high EMU inflation annex the risk of (EMU) interest rates to stay high for even longer than currently expected, probably was one of the reasons for this week’s rebound of EMU equities to run into resistance (Eurostoxx 50 -0.1%). US equities open with limited gains after a three-day rebound (S&P +0.2%).
In FX markets, the euro initially hardly gained on the EMU inflation data. A bit strangely, finally it was the dollar that succumbed after the US Q2 GDP revision. EUR/USD regained the 1.09 big figure (1.092) and is breaking out of the downtrend channel since mid-July. DXY extends its correction (103.1 from 103.53 open). The yen still only profits from the correction especially in US yields trading at USD/JPY 145.65 after touching a YTD top of 147.37 yesterday. In the, UK money supply and lending data were on the softer side of expectations. UK Gilts slightly outperform Bunds. However, for now this is causing no further harm for sterling. EUR/GBP yesterday and this morning tested the 0.861 area, but move stalled (currently 0.859).
News & Views
Belgian inflation rose by 0.76% M/M in August with the annual figure virtually stabilizing at 4.09% Y/Y (from 4.14%). Core inflation stood at 7.7% Y/Y from 7.88% in July. Inflation for services was almost flat at 7.26%. Inflation for rents has increased to 6.14% from 6.07%. Food inflation (including alcoholic beverages) now stands at 12.73%. The most significant price increases in August were registered for motor fuels (6.8% M/M), liquid fuels (12.5% Y/Y), hotel rooms (9.4% M/M), confectionery (6.1% M/M), bread and cereals (1.6% M/M), alcoholic beverages (3.1% M/M), non-alcoholic beverages (2.3% M/M), organized vacations in Belgium (10.9% M/M) and personal care (1.5%M/M). However, electricity (-2.5% M/M), fruit (-4.2% M/M) and plane tickets (-7.1% M/M) have had a decreasing effect on the index.
The Swiss KOF Economic Barometer decreased in August from 92.1 to 91.1 and that way remains at a below-average level. Details showed a general deterioration except for construction and domestic consumption. By contrast, sentiment has particularly worsened in services, followed by export-oriented business and hotels and restaurants. In the producing sector (manufacturing and construction), in particular the indicators on the employment situation developed negatively. The Swiss franc loses out against an overall stronger euro today with EUR/CHF rising to 0.9575 from 0.9550.
