Market movers today
Another day with tier-2 releases, as we are waiting for euro area and US inflation data later this week.
In the US, we get consumer confidence and preliminary trade data.
In the euro area, money supply and lending data are due out.
In Sweden, retail sales and trade data are due out this morning. Norwegian consumer confidence was out this morning, falling to 16.4 in Q3 from 19.6 in Q2.
Selected market news
The US and Mexico struck a trade deal yesterday sending stock markets and bond yields higher, see Bloomberg for more details. The deal will replace NAFTA and Trump said yesterday that he hopes Canada will join the agreement as well. The deal has given some hope that Trump is moving back from the brink of a global trade war after his recent agreement with the EU as well. What s left is still a solution to the US-China trade war but it may be part of Trump’s strategy to isolate China to put maximum pressure on them to get more concessions before making a trade deal. We still believe Trump will turn the pressure up a notch on China by announcing tariffs on another USD200bn worth of Chinese imports in September. However, market hopes of a trade deal with China sooner or later are moving higher as Trump strikes other deals.
Another positive for the European markets yesterday was an upside surprise in the German ifo business confidence. The expectations index, which is the forward-looking part of the survey, jumped from 98.2 in July to 101.2 in August (consensus 98.4), giving yet further evidence that the decline in euro area growth momentum is behind us, as also witnessed by euro PMI data last week.
The San Francisco Fed yesterday released a paper on the US yield curve as a predictor of recessions. The paper concludes that an inversion of the yield curve has been a reliable indicator of recession but that the most useful measure is the difference between US 10-year yields and the 3-month Treasury rate – not the spread between 10-year yields and 2-year yields, which is often referred to. Measured on this spread they highlight that the curve is still far from inverting as the spread is nearly one percentage point away from inverting. The paper also argues against the case that ‘this time is different’ compared to previous periods of curve flattening when judging the predictive properties of the yield curve. Finally, the authors highlight that correlation is not the same as causation and say that ‘great caution is therefore warranted in interpreting the predictive evidence’.
If the paper is representative of the FOMC views it doesn’t suggest that the yield curve should be an obstacle for a continued gradual hiking path well into 2019. For more on this topic listen to our Macro Strategy Views Podcast released yesterday: Why the UST curve will invert and implications for euro markets.
