Markets:
Global core bonds treaded water in an uneventful European trading session. Dynamics changed in US dealings. Core bonds started losing ground with US Treasuries underperforming German Bunds anticipating on Fed Chair Powell’s speech in Jackson Hole and reacting to strong US durable goods orders. The proxy for investments in the report rose a stronger-than-expected 0.9% M/M in July, following a similar increase in June. It further confirms the current strong momentum of the US economy. US Treasuries erased losses after Powell’s speech. The Fed chair confirmed the central bank’s gradual rate hike path, but stressed that currently there are no signs of an overheating US economy or from inflation rising rapidly above the Fed’s 2% goal. By pointing these out, he clearly signaled no intention to step up the tightening process at this stage in the cycle, causing a mildly dovish market reaction. The US yield curve bear flattens at the time of writing with yields 0.8 bps (2-yr) to 0.4 bps (30-yrà higher. The German yield curve bear steepens with yields 0.1 bp (2-yr) to 1.1 bp (30-yr) higher. 10-yr yield spread changes vs Germany are broadly unchanged with Italy underperforming (+3 bps).
After a brief dollar recovery yesterday, a sell-off in USD/CNY around noon marked the start of new losses for the greenback as market eagerly awaited Powell’s speech at the Fed symposium. Durable goods orders in the US were below expectations (-1.7% vs. -1.0% expected). More important core measures (non-defense, excl. aircrafts), however, were stronger than anticipated, yet with little impact on dollar trading. Instead, and while remarks from other Fed-members (Mester, Kaplan, Bullard …) triggered some intraday volatility, markets full attention went to Powell. In his speech, the Fed chair struck a rather balanced tone, saying he sees “good reasons to expect the strong economy to continue” while there “doesn’t seem to be elevated risk of overheating”. He sees “no clear signs of inflation accelerating above 2%”, confirming a gradual rate hiking path. His upbeat but nuanced message disappointed dollar bulls who were looking for clues for an increased normalization process. The dollar extended losses, with EUR/USD currently changing hands at 1.162, confirming the technical break (1.1510) earlier this week.
Sterling lost further ground vs. the euro today. While confident of reaching an agreement, brexit minister Raab provided the first details of UK’s no-deal contingency plan yesterday. However, markets were left unimpressed. Moreover, having the country to prepare for such a scenario rattled investors and the pound rather than actually having soothed them. EUR/GBP edged higher throughout the day, interrupted twice by sterling’s shy comeback attempts. However, without any good news (from the brexit or data front) to support the pound, the pair is currently testing important resistance levels at 0.9031/45. Cable gained as the dollar weakened, currently trading at 1.287.
News Headlines:
Italian media reported US President Donald Trump offered to buy Italian sovereign bonds next year. The offer was made when Italian prime minister Conte met US President Trump in the Oval Office last month. It remains unclear how Trump would impose this to the Fed, since the central bank operates independently.
China’s earlier made promise to open up its financial system is getting shape, despite rising trade tension with the US. The China Banking and Insurance Regulatory Commission announced that non-Chinese financial institutions will now be treated the same as local companies. Foreign stakes were until now capped at 20 or 25%.
Orders placed with US factories for business equipment grew with 1.4% in July (0.5% expected), which is a lot better than the upwardly revised 0.6% from June. Shipments of those goods, which is a proxy for business investment in US GDP, rose a stronger than expected 0.9% M/M, following an upwardly revised 0.9% M/M increase in June. This signals that solid growth into Q3 despite the ongoing trade dispute between the US and China.
