Markets
Investor cautiousness preceding the Bank of Japan policy meeting put core bonds under pressure yesterday. The BoJ decided this morning to keep (the unchanged) interest rates low for “an extended period of time” and kept the 10-y yield target near 0.0%. The BoJ also allows greater flexibility surrounding the 10-y yield target (up to ±20 bps). US eco data (PCE core, PCE deflator, personal spending) came in close to/a little below expectations. EMU data was more mixed as GDP growth (2.1% YoY) was slightly below expectations (2.2% YoY) while CPI (headline 2.1% YoY vs. 2.0%, core 1.1% YoY vs. 1.0%) beat consensus. However, neither US nor EMU data triggered a significant impact on yields and, in any case, were eclipsed by the BoJ. After witnessing a BoJ induced relief rally, core bonds took a step back. This is especially the case for the German Bund. We think the newly introduced flexibility by the Bank of Japan – which is likely to lead to a steeper yield curve – makes markets ponder whether the EMU yield curve flattening (at the longer end) has gone far enough. This Bund underperformance held on more clearly until headlines appeared, reporting China seeks to restart US trade talks. Intra EMU-spreads also narrowed with Italy outperforming (-3bps).
Today, the EUR/USD rebound continued. The move started Friday evening as the dollar failed to gain on a solid but as expected US Q2 growth. In this respect, the move in the first place started as USD softness rather than euro strength. However, yesterday interest rate differentials narrowed already further in favour of the euro/in disadvantage of the dollar. Initially, US and European bond yields eased this morning as the BOJ kept is policy/target rates unchanged. However, the US-German interest rate differential soon widened again and supported further EUR/USD gains. EMU data were mixed with inflation (both core and headline) slightly beating the consensus. However, EMU Q2 growth was softer than expected (0.3% Q/Q vs 0.4% expected). Even so, the euro temporarily kept its intraday upward bias. In the afternoon US spending and income data were as expected, but the price deflators were marginally softer than expected. EUR/USD came close to the 1.1750 intermediate resistance, but the area again proved to be tough resistance. EUR/USD trades currently in the 1.1715 area. So for now, EUR/USD remains locked in the established sideways range. The yen fell prey to profit taking today as the BOJ made only limited changes to its monetary stimulus program. The move started rather slowly this morning, but gained momentum during the US trading session. USD/JPY trades in the 111.80 area. The move was supported by a positive risk sentiment at the start of the US trading session as China was said to seek to restart talks with the US to defuse a trade war.
Today, EUR/GBP trended further north of the 0.89 barrier. UK Gfk consumer confidence (-10 vs -9 expected) published overnight maybe was a slightly sterling negative. However, the EUR/GBP was mainly euro driven. EUR/GBP trades in the 0.8920 area. 0.8958/68 resistance is coming closer but also proved to be though. Cable rose temporarily on USD softness this morning, but the pair currently trades little changed in the 1.3130 area.
News Headlines
European data came in mixed today. Inflation rose by 2.1% in July (YoY), from 2% the month before. The core inflation also rose from 0.9% to 1.1% (1% expected). EMU GDP growth slowed to 0.3% (QoQ), with 0.4% expected, leading to a lower GDP growth (YoY) of 2.1% (2.2% expected). The unemployment rate remains 8.3%.
IMF has signaled that the current debt relief deal between the EU and Greece is not sufficient. It warned the EU governments that Greece’s debt relief package is fine for the medium run, but it will need more long-term debt relief, if it wants to return to international capital markets after eight years reliant on loans from the EU and IMF.
US PCE Core (MoM) rose marginally with 0.1% in June, coming from 0.2% in May, keeping the year-on-year increase at 1.9% for a third straight month. The Chicago Purchasing PMI rose to 65.55 (from 64.1 in June) while a drop to 62.0 was expected. The Conf. Board Consumer confidence rose to 127.4 (vs. 126.0 expected).
