Markets
Yesterday, price action on US and EMU bond markets was mainly driven by the BOJ policy decision. US and EMU bonds enjoyed a relief rally as the BOJ left its policy rate and the target for the 10-y yield unchanged. However, bonds soon reversed a big part of the rebound with Bunds underperforming. Eco data were mixed (EMU: CPI and GDP) to mostly stronger than expected (US: spending and income, Chicago PMI and consumer confidence) but had only a limited impact. At the end of the day, both the US and EMU curves showed a mild flattening, with a modest yield decline for longer maturities. Still, the move was limited given the pre-BoJ yield rise. This morning, the Japan10-y yield rises 5 bp testing the recent peak (0.11%). Markets are testing the limits of BOJ tolerance after the Bank indicated a wider (+/- 0.2%) trading band for 10-y bonds. For now, there is only a moderate negative spill-over on US Treasuries. Today, the final EMU manufacturing PMI will be published. The US calendar contains the ADP labour report and ISM manufacturing. Recently, US data came out fairly solid despite the trade tensions. We see no obvious trigger for this trend to change. Still, the market focus will be on the Fed policy statement. We expect the Fed to keep its (positive) assessment on the economy from the June meeting. Even so, late markets were reluctant to fully join the June Fed dot-plot indicating two additional rate hikes this year. This reluctance is also visible in the sideways pattern in LT US yields and in the flattening yield curve. We doubt that an unchanged Fed assessment will turn the markets’ view. For that to happen, more strong data (e.g. Friday’s payrolls) or positive trade headlines are probably needed. We also keep a close eye at the Bund contract after recent underperformance. A drop below the pre-BOJ low (161.33) might further hurt the technical picture.
Yesterday EUR/USD initially trended higher despite mixed EMU eco data. A (modest) narrowing in the US/German interest rate differential probably support the technical rebound. EUR/USD came close to the 1.1750 resistance, but a real test/break again didn’t occur. The dollar regained momentum supported by strong data. EUR/USD closed at 1.1691 (from 1.1706). USD/JPY outperformed, partly due to a softer yen after the BOJ decision. Today, the question is whether good US data and a confirmed positive Fed assessment on the US eco will be able to trigger a USD rally beyond recent ranges. Of late, the USD ranges (EUR/USD-DXY) were very solid. Some further USD gains are possible, but a break of EUR/USD 1.15 or of DXY 95.50 is not evident. USD/JPY showed a nice rebound yesterday, but the rise might slow as Japanese yields are again rising. The US-China trade developments remain a wild card.
Yesterday, EUR/GBP temporary extended gains north of 0.89 in order-driven, technical trade. However in line with the EUR/USD price action the pair closed the session little changed at 0.8909. Today, the UK Manufacturing PMI is expected to ease slightly to 54.2 (from 54.4). The report is unlikely to derail market expectations for a BoE rate hike tomorrow. We expect more sideways trading for EUR/GBP near the 0.89 barrier.
News Headlines
China’s July manufacturing PMI falls to 50.8 from 51.0 in June (50.9 expected), which is the slowest pace in eight months as export orders declined yet again. Despite rumors of talks between US Treasury Secretary Mnuchin and Chinese VP Liu He, others say the US will propose to raise its planned tariffs on $200bn from 10% to 25%. • The US has said to expect North Korea to continue its denuclearization process, despite satellite material detecting renewed activity at a North Korean nuclear facility. The US State Department said it would press other southeast Asian nations this week to maintain sanctions against North Korea.
The EU is willing to offer the UK a deliberately vague declaration on future EU-UK ties, if it helps UK Prime Minister Theresa May avoid a ‘no deal’ outcome. The new development comes after May and Germany’s Chancellor Merkel met last week. She also cuts her holiday short to meet French President Macron later this week.
