Markets
Today, two factors dominated global markets’ trading. Firstly, this morning, the US started imposing tariffs on $34 bln of Chinese imports. In response, China also imposes tariffs on a similar amount of US products. Both actions were more or less expected and no surprise for markets. There was little negative impact on global equities. Investors were mainly looking out for signs whether or the not the process would escalate further. In the meantime, core bonds hovered in tight ranges, holding near recent levels. In the afternoon, the focus turned to the US payrolls report. The report was quite similar to what was often reported over the previous months/quarters. Payrolls’ growth was strong (213k and a 37k upward revision of the previous two months) but wage growth again disappointed at 0.2% M/M (0.3% expected). The latter was most relevant for markets. Slow wage growth indicates that further Fed tightening might continue at a gradual pace. Core US/European yields declined slightly after the publication of the payrolls. The 2 & 5-y yield decline 2 bp. The 30-y eases 1.5 bp. Changes on the German yields curve also moved less than 2bp. This time, the very long end underperformed (30-y +0.5 bp). Intra-EMU spreads versus Germany (10-y) narrow marginally with Italy (-4bp) and Portugal (-2 bp) doing best. So, the payrolls were not able to give bond market a new, directional impetus.
Yesterday, EUR/USD made some cautious progress (ECB interest rate debate and risk sentiment becoming less sensitive for the trade war theme). This trend continued today. This morning, markets didn’t know what to conclude from the US and China imposing tariffs on mutual imports. However, this new stage in the trade war didn’t cause any outright risk-off reaction. This constructive reaction also helped EUR/USD to hold north of 1.17. In the afternoon, the US payrolls triggered some modest further USD losses as wage growth disappointed again. The dollar probably won’t get much additional interest rate support anytime soon. EUR/USD cleared the 1.1720 resistance and trades currently in the mid 1.17 area. However, the next resistance at 1.1850 still looks quite far away. USD/JPY also lost a few ticks after the payrolls but still trades in well-known territory in the mid 110 area. Whatever, the payrolls again didn’t change the broader picture for USD trading in any profound way.
Sterling traders basically stayed side-lined. There were no really important UK data. Markets eagerly await the outcome of a key UK Cabinet meeting. At this meeting, the UK PM is trying to reach a consensus on what relationship the UK will try to pursue with the EU after Brexit. However, as the UK government/conservative party are highly dived on the issue, the outcome involves quite a binary risk for sterling trading. EUR/GBP didn’t go anywhere for most of the day. EUR/GBP gained a few ticks in line with EUR/USD after the US payrolls. The pair trades in the 0.8860 area. Cable also profited slightly from the USD decline after the payrolls (1.3270 area).
News Headlines
German industrial production rebounded at a faster than expected pace in May. Production grew 2.6% M/M and 3.1% Y/Y. The consensus only expected production to rise 0.3% M/M and 1.5% Y/Y. The April figure was downwardly revised (-1.3% M/M vs -1.0%). Even so, the data suggest German growth remained at a decent level in Q2 even as the growth momentum turned less strong than was the case last year and as special factors were at work in Q1.
US nonfarm payrolls confirmed the great shape of the US labor market. The economy added 213k jobs in June, more than the 195k expected, but less than the 244k in May. The unemployment rate ticked up from the record low 3.8% to 4% in June but is counterbalanced by an increase of the participation rate (62.9% vs 62.7% expected). Average Hourly Earnings rose 0.2% M/M and 2.7% Y/Y in June, lower than lower than the 0.3% M/M and 2.8% Â Y/Y expected. This slow wage growth suggests ongoing moderate inflationary pressure.
