Market movers today
The UK inflation report for July is the key release in Europe today, where we estimate CPI inflation fell to 2.3% y/y from 2.4% y/y in June. In general, we believe the inflation prints will be interesting to follow in H2 18, as we believe the Bank of England is too optimistic on the inflation outlook.
In the US, retail sales for July are due out, which are likely to show that private consumption remains the main growth driver in the US. Manufacturing production and the Empire Manufacturing Index are also on the agenda.
Selected market news
Turkish President Erdogan’s speech yesterday brought little news apart from calling for a consumer boycott of American products and as no news is good news for markets at the moment, USD/TRY came down to the levels of last Friday. We still see it as too early for the Turkish crisis to be over just yet, also because Turkey remains in a financially weak position and the fundamental and diplomatic issues remain unresolved.
As the Turkish lira issue calmed somewhat, we also saw a reversal in the spread widening between the core EU and periphery yields yesterday. That said, the yield on Italian 2Y government bonds remains well above 1% and the 10Y yield is trading around 3%. Comments from Italy’s eurosceptic head of budget committee, Claudio Borghi – that the ECB should shield Italy from market forces – did nothing to allay investor concerns about Italy’s lingering political risks.
Equity markets show a mixed picture this morning as the risk-off mood lingers, with US index futures pointing to a weaker opening and Asian shares mostly edging down. EUR/USD fell to its lowest level since June 2017, despite European macro data surprising on the upside yesterday. German Q2 GDP growth rebounded to 0.5% q/q driven by stronger domestic demand, and German ZEW expectations picked up after falling for eight consecutive months driven by more upbeat sentiment in the automobile sector. Euro area GDP growth for Q2 was also revised up to 0.4% q/q on the back of the stronger German data. Overall, the data supported our view that we will see continued solid growth in the euro area in Q3 following subsiding trade risks and EUR depreciation.
For those of you returning from holiday, here is a quick wrap-up of the main themes over the past three weeks: Vacation Wrap-Up: Market themes over the past three weeks , 12 August 2018.
