Markets
Global core bonds traded with a small upward bias going into Fed Powell’s semi-annual testimony before US Congress. Risk sentiment dwindled with energy and technology shares paving the way lower. The former suffer from the correction lower in oil prices since last week (>$79/barrel to <$72/barrel). The latter from disappointing Netflix earnings. Nasdaq underperforms in the US stock market opening, coming off record high levels. Powell’s prepared remarks for US Congress suggested that the best way for the Fed is to keep gradually raising rates for now. Risks to the economic outlook are balanced between upside risks coming from the impact of tax cuts and increased government spending and downside risks due to trade negotiations. The US Note future ticked lower in a first reaction as Powell didn’t overemphasize the trade war or the flattening of the US yield curve. Those topics could still be covered in the Q&A session though which is ongoing. The US curve bear flattens marginally with yields 0.8 bps (2-yr) to 0.3 bps (30-yr) higher. The German yield curve flattens as well, with yields up to 1 bp lower. 10-yr yield spread changes vs Germany are virtually unchanged with Italy (-8 bps) outperforming.
The dollar initially continued to trade soft as investors pondered the economic assessment of Fed’s Powell at today’s hearing before a Senate committee. EUR/USD rebounded to the 1.1745 area. However, the dollar received a better bid early in US dealings. We didn’t see a clear trigger. The USD rise remarkably occurred more or less as US yields declined slightly at the same time. So, the move was unlikely to be inspired by a more positive anticipation on Fed Powell’s testimony at that time. Risk sentiment turned a bit more negative this afternoon. That might have explained the decline of EUR/USD, but is a bit at odds with the further rise of USD/JPY. Whatever, the Fed governor kept a positive tone on the US economy in the written text of his Senate hearing and even on the global economy though there are important sources of uncertainty. EUR/USD hovers just below the 1.16 big figure. USD/JPY is testing the recent top in the 112.80 area. The Powell comments are unable to break the stalemate in EUR/USD trading.
UK labour market data showed a similar picture as was often the case of late. The unemployment rate held at a multi decade low and employment rose again more than expected. However wage growth remained mediocre. The report was interpreted as strong enough for the BoE to raise the policy rate at the August meeting. Sterling temporary gained a few ticks after the labour data. However, the focus soon returned the next part of the Brexit saga on headlines that the labour party would support an amendment of the soft Brexit rebels in the conservative party. A new defeat on another key piece of Brexit legislation might further raise tensions within the conservative party. Sterling was again sold upon the publication of the new Brexit headlines. EUR/GBP jumped close to the 0.89 level. (currently 0.8885). Cable dropped mid-1.31 area.
News Headlines
UK labour market data confirmed recent trends. UK job growth rose more than expected at 137 000 in the three months to May (115 000 was expected) with full time jobs responsible for the bulk of the increase. The unemployment rate stabilized at 4.2%; the lowest level since 1975. However, wage growth eased from 2.6% Y/Y to 2.5% Y/Y. Core wage growth ex bonuses also eased to 2.7% from 2.8% in the previous three months.
US industrial production rebounded in June (+0.6% M/M) following a downwardly revised 0.5% M/M decline in May. Manufacturing production and further gains in mining output were driving forces behind the pick-up and further evidence of a strong Q2 US GDP. The Atlanta Fed currently forecasts 4.5%Q/Qa.
