Markets
Yesterday’s core bond sell-off grinded more or less to a halt this morning. The Bund opened lower but recovered partly before noon. US Treasuries moved sideways throughout the day, awaiting the US payrolls. European equity markets and Italian BTP’s continued yesterday’s downward trend at the opening of European trading. ECB president Draghi initiated the move by pointing out the risks of a heightened budget deficit to Italian president Mattarella. Italy’s bureau of statistics said its leading indicator for economic growth maintained a descending profile, refuting the Italian government that counts on an increase of economic growth to counteract the larger budget deficit. Lega-leader Salvini sneered at EC president Juncker and European Commissioner Moscovici, saying the EU and Italy are in bad shape because of people like them. JP Morgan added that Italy’s ‘efforts’ to lower its budget deficit won’t stop rating agencies from downgrading Italy’s credit score. The Italian bond futures thus lost ground, and stabilized after lunch. Focus returned to the event of the day, US payrolls. US labour market showed its continued strengthening, though the data is in line with expectations. Apart from some modest report-related swings, the US treasuries gained limited ground on the strong report. US yields are adding 2.1 bps (2-yr) to 3.2 bps (30-yr). The German yield curve bear steepened, ranging from -0.2 bps (2-yr) to 0.3 bps (30-yr). 10-yr spread changes vs Germany remained unchanged with the exception of Italy (+5bps).
As is usually the case when important data are due, currencies trade rather subdued. Today was no exception as the dollar barely moved in trading hours preceding the September payrolls. If anything, the greenback slightly predominated during the European risk off trading session, before grinding lower as markets braced for today’s main event. The September job report showed 134 000 new US jobs. While markets anticipated a 185 000 increase, the two-month net revision amounted up to 87 000. Unemployment dropped to a multi decade low of 3.7% as labour participation remained stable at 62.7%. Average hourly earnings increased an expected 2.8% YoY (0.3% MoM), down from 2.9% in August. All in all, the job report highlighted ongoing labour market strength, further supporting the case for a December hike, but held no significant surprises from a markets point of view. The dollar traded accordingly after the numbers, losing ground only very slightly. EUR/USD is changing hands at the 1.152-zone, virtually unchanged from yesterday’s close.
The UK’s economic calendar only contained second tier data, leaving trading up to technical and sentimental considerations. EU diplomats again struck an upbeat tone this morning, saying they see a brexit deal “very close”. Later, EC president Juncker hailed both sides’ efforts to make progress on the issue of the Irish border. Negotiations are likely to continue over the weekend, after which brexit minister Raab will pay Brussels a visit. The next few weeks will prove important for both brexit and the queen’s money. After EU-negotiator Michel Barnier presents and discusses the draft declaration on the future relationship on October 10, a formal brexit summit (including May) takes place just one week later. For now, sterling jumped amid growing brexit optimism, extending the remarkable recovery that started last week. EUR/GBP (0.882) is filling bids at levels not seen since early July.
News Headlines
The Indian central bank unexpectedly kept rates stable at 6.5% today. Following two months of slowing inflation, the central bank wishes to assess the impact of previous hikes before raising rates anew. However, the central bank changed its stance from neutral to “calibrated tightening”, signaling more hikes in the future. The Indian rupee lost ground following the decision, setting a new all-time low against the dollar.
Canadian employment increased more than expected, adding 63 300 new jobs vs. 25 000 anticipated by markets. Part time employment (80 200) rebounded from last month’s steep decline, while full time jobs decreased with a little less than 17 000. The unemployment rate dropped to 5.9%.
Irish Foreign Minister Simon Coveney said it is hard to know if the UK’s new backstop proposal will suffice to avoid a hard border on the island of Ireland. He said new and intensified negotiations with Brussels are needed to come to an agreement.
