- Main European equity markets gain more than 0.5% in a news-thin trading session. US stock markets open mixed with Nasdaq outperforming (+0.25%).
- Dallas Fed Kaplan said that inflation is "sort of back on trend" and that he doesn’t think there’s a deteriorating trend in price pressures. He sees two more interest rate increases and an announcement of plans to reduce Fed’s balance sheet this year.
- EMU CPI inflation slowed more than forecast in May, falling from 1.9% Y/Y to 1.4% Y/Y. Underlying core inflation decelerated from 1.2% Y/Y to 0.9% Y/Y, strengthening ECB Draghi’s case to keep monetary policy ultra-easy. The EMU unemployment rate fell from 9.5% to 9.3%, its lowest level since March 2009.
- The Chicago PMI declined from 58.3 to 55.2 in May, while consensus only expected a drop to 57. However, given the volatile history of the Chicago PMI, this outcome didn’t bother investors.
- US President Trump has decided to withdraw from the Paris climate accord, Axios reported, citing two unidentified sources with direct knowledge of the decision. Trump, who has previously called global warming a hoax, refused to endorse the landmark climate change accord at a summit of the G7 group of wealthy nations last Saturday
- A renewed pledge from Saudi Arabia and Russia, two of the world’s biggest oil producers, to bring down surplus inventories failed to stem a decline on Wednesday in the price of crude oil. Brent crude declined from $52/barrel towards $50/barrel.
- Europe must stop stalling and agree on debt relief measures for Greece on June 15 to revive the only EMU economy still in recession, ECB Coeure said. He added that if the meeting agreed sufficiently clear measures, this would allow the ECB to consider including Greek bonds in its asset purchase programme.
Rates
Brent crude oil tests psychological $50/barrel mark
Global core bond investors remained side-lined today ahead of key US eco data tomorrow (ADP, manufacturing ISM) and Friday (payrolls). Both the Bund and US Note future traded again in a narrow sideways range. The impact from positive risk sentiment on European stock markets (>+0.5%) and weakness in oil prices ( drop from $52/barrel to $50/barrel) cancelled each other out. EMU eco data printed mixed with a bigger drop in EMU inflation, though anticipated after lower German/Spanish/French CPI readings and an unexpected decline in unemployment rate to the lowest level since March 2009. Dallas Fed Kaplan sounded less concerned about the recent setback in US inflation than Washington-based Fed governor Brainard yesterday and sticks with his rate call (2 more hikes this year). Markets shrugged their shoulders.
At the time of writing, changes on the German yield curve range between -0.1 bp (2-yr) and +0.3 bps (30-yr). Changes on the US yield curve vary between -0.2 bps (2-yr) and +0.7 bps (5-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed 1 to 4 bps with Portugal outperforming (-7 bps) and Greece underperforming (+3 bps).
Currencies
Euro erases early losses. Dollar fails to convince
The euro outperformed most other major currencies today. EMU inflation declined more than expected. At the same time, German and EMU unemployment beat market consensus. The combination of good growth, low inflation and the expectation of only very gradual ECB policy normalisation triggered some kind of European risk rally. EMU assets and the euro are outperforming. EUR/USD trades in the 1.1225 area. USD/JPY (110.85) again hardly profits from this risk rally.
Overnight, Asian markets showed a diffuse picture. Chinese equities opened strong, supported by better than expected China PMI’s, but the gains evaporated. Japan underperformed. USD/JPY held in the 111 area. End-of-month USD buying from US importers is said to prevent a further decline, for now. EUR/USD traded with a slightly negative bias in a tight 1.1190/65 range.
Trading on most markets, including in the major FX cross rates, was confined to tight ranges during most of the morning session. EMU eco data were mixed. EMU headline inflation declined more than expected from 1.9% Y/Y to 1.4% Y/Y, supporting recent calls from ECB president Draghi that the EMU economy still needs ample monetary support. At the same time, the German unemployment rate dropped to 5.7%, a record low. The EMU unemployment rate also declined faster than expected to 9.3%, the lowest level since 2009. Initially, the data had hardly any impact on trading. Sentiment changed as US traders joined the action. Some kind of European risk-on trade kicked it with European equities and the euro outperforming. The combination of strong growth, benign inflation and expectations for only a gradual scaling back of ECB policy stimulation triggered a repositioning in favour of European assets, including the single currency. EUR/USD rebounded back above the 1.12 area. Remarkably, interest rate differentials between the US and Germany/EMU hardly changed. A sharp decline of oil didn’t help the dollar. Other interesting remark: USD/JPY again didn’t profit from the (European) risk rally. The pair even fails to hold north of 111 (currently 110.85). EUR./USD is changing hands around 1.1218, a combination of euro strength and USD softness. Later today, USD traders will keep an eye at the Fed Beige Book, preparing the June 13-14 meeting.
EUR/GBP returns close to recent top
Investors sold sterling this morning as a YouGov poll indicated that the Conservative party might fail to secure a majority in the June 08 election. Sterling was already under pressure in Asia and the pressure intensified early in Europe. Cable dropped temporary below 1.28 (even as the dollar wasn’t in good shape either). EUR/GBP rebounded north of 0.87. The pressure on sterling eased later in the session, maybe as other polls still give quite a significant lead for the conservative party. Especially cable rebounded and trades again in the 1.2840/50 area, reversing most of the overnight loss. EUR/GBP (0.8735) holds near the recent highs as the euro remains well bid across the board.
