Markets:
Global core bond lost ground today with US Treasuries underperforming German Bunds. A classic risk-on sentiment ruled trading, with Chinese equity gains spilling over to European equity markets. At time of writing, major EU indices gains range from 1% to 2.5% with the CAC40 outperforming. German Bunds are able to limit the loss despite the obvious improvement in risk sentiment. End of month extension buying might be at play. EMU inflation data was spot on and had little to no influence on trading. German Bunds are currently hovering slightly below yesterday’s closing levels. US equities opened with gains exceeding 1%. US Treasuries are, in contrast to Bunds, not capable of holding ground and edge substantially lower throughout the day. A stronger than expected ADP employment report might have helped. The private sector hired 227k new employees, while an increase of only 187k is expected. Investors are already eyeing Friday’s US payrolls. The US yield curve edged higher today with the belly of the curve underperforming the wings. Changes range from +2.4 bps (2-yr) to +3.5 bps (10-yr). The German yield curve behaves in a similar manner with changes from +0.8 bps (2-yr) to +1.9 bps (10-yr). Peripheral bond spreads over Germany narrow with Italy (-9 bps), Greece (-4 bps) and Spain (-3 bps) outperforming.
King dollar extends its reign over FX markets despite a >1.5% surge on US stock markets. The trade-weighted dollar bumped into 97-resistance and eventually cleared the hurdle after a strong US ADP employment report added evidence to US labour market strength. US employment costs also rose more than forecasted in Q3 (0.8% Q/Q from 0.6% Q/Q). More and more anecdotic evidence suggests that US (wage) inflation is set to rise further, forcing the Fed into a more aggressive rate hike cycle than markets currently anticipate. The US/German 2-yr yield spread tests the 350 bps cycle high. EUR/USD dropped from the 1.1350 area towards the low 1.13 region. A test of EUR/USD 1.1301 (2018 low) is in the cards. Key support kicks in at 1.1187 (62% retracement from 2017-2018 rally). Tomorrow’s US manufacturing ISM and Friday’s payrolls could play a determining role. Headline (2.2% Y/Y from 2.1% Y/Y) and core EMU inflation (1.1% Y/Y from 0.9% Y/Y) increased as expected, but didn’t bring reprieve for the single currency. Is this the start of ECB President Draghi’s predicted vigorous pick-up in underlying inflation? USD/JPY changes hands above 113. Sterling reverses yesterday’s remarkable decline, shrugging off S&P warning that chances of a no-deal brexit have increased and could spark a long recession and rating downgrade. EUR/GBP currently trades around 0.8870, from a 0.8929 opening. The queen’s money even has the upper hand over the dollar today, with GBP/USD ending the recent losing strike and rising from 1.2706 to 1.2770. Sterling investors’ next appointment is tomorrow’s Bank of England meeting, including a new inflation report and a press conference by governor Carney.
News Headlines:
According to the ADP employment report of October, 227k new employees were added to an already hot US labour market. It beats market expectations of 187k and is little shy of September’s 230k. The increase in hiring was led by large-sized companies, adding 102k jobs. The Chicago PMI dropped more than forecast in October, from 60.4 to 58.4, while consensus expected a 60.0 outcome.
ECB governors Hansson and Nowotny said that recent disappointing EMU eco data don’t fundamentally alter the ECB’s growth/inflation forecasts yet. This message is in line ECB Draghi at last week’s press conference. The chairman indicated that the EMU economy lost momentum, but that it didn’t enter a downturn. ECB governors therefore argue to move ahead with the ECB’s normalization process as plotted out in June.
