Markets
Core bonds remained under selling pressure today. US Treasuries followed the Japanese JGBs sell off in early trading hours and continued to edge lower during the day. While no major changes are expected, US Treasuries probably take a cautious approach going into the Fed meeting later today. Treasury losses mounted minutes before a very strong ADP employment change (219k vs. 186k expected) was released. US rates touched intraday- (and in some cases monthly) highs after the US Treasury Department announced its quarterly refunding plans (10-y caps the 3%-ceiling!). In Q3, auction sizes of virtually all maturities will increase ($1b per month for 2-y, 3-y and 5-y, $1b for the quarter for longer maturities) as US borrowing needs in the second half of the year will be the most since the GFC. The JGB sell off also spilled over to European markets. After opening lower, the German Bund continued to build up losses in lockstep with Treasuries. At the time of writing, the US yield curve bear steepens with yield changes ranging from 1bp (2-y) to 4.8 bps (10-y) over 5.8 bps (30-y). The German yield curve also bear steepens as rates increase 1.8bps (2-y) to 4.3bps (10-y).
USD trading in general (as measured by the trade-weighted dollar) and trading in EUR/USD in particular developed in a relative calm compared to the price moves on the bond markets. USD traders apparently didn’t know what card to play in the run-up to this evening’s Fed policy statement. In the recent past, trade tensions between the US and China often were supportive for the dollar (ex-USD/JPY). This time, the trade war headlines had little impact on EUR/USD trading. Eco data (in line final EMU PMI, strong ADP report) had also little impact on USD trading. The US currency even lost temporarily a few ticks as the US Treasury announced (higher) funding needs for the third quarter. Over the previous days, interest rate differentials between the US and Germany showed a tentative narrowing, but this trend slowed today even as global core yields remained under upward pressure. EUR/USD is holding a tight sideways range close to, mostly slightly below 1.17. USD/JPY filled offers in the 112.15 area late in Asia this morning. The yen regained modest ground on higher Japanese yields and as the trade war rhetoric between the US and China become again more aggressive. USD/JPY trades currently just below the 112 area.
Today, EUR/GBP trading was still driven by technical considerations as investors await tomorrow’s BOE policy decision. The UK July manufacturing PMI eased from 54.3 to 54.0 (54.2 was expected). However, the report didn’t change the global picture on the UK economy. The market still sees a 90%+ chance on a BOE rate hike tomorrow. ERU/GBP lost a few ticks and trades again in the 0.90 area. Cable is little changed compared to yesterday’s close (1.3125 area).
News Headlines
The US Treasury Department will raise the amount of long-term debt it sells to $78bn this month and will launch a new two-month bill, starting from October. The Treasury’s borrowing needs for Q3/Q4 hasn’t been this high since the financial crisis 10 years ago, due to tax cuts, higher government spending and aging population.
China said the US threat of levying 25% on $200bn of Chines imports, instead of the 10% the US had put forward on July 10, will not work. It answered that this “blackmail” won’t work and it would hit back. The tariffs target thousands of Chinese imports.
The Reserve Bank of India has raised its policy rate by 25 bp to 6.50%, following an earlier raise of 25bp last month. The bank said the move is necessary due to this month’s increase in the “minimum support prices” guaranteed to farmers, causing price pressures. It repeated however, that its stance remains ‘neutral’.
