Markets
Global core bonds extended their rally today with US Treasuries hugely outperforming German Bunds. A very poor US ADP employment report (+27k) pulled the trigger. One swallow doesn’t make a Summer, but it’s the first time the final stronghold of the US economy – the labour market – shows signs of cracks. The stakes for Friday’s payrolls are high. Consensus forecasts another strong 180k net job gain. Yesterday’s comments by Fed Chair Powell and vice-chair Clarida, both hinting at a rate cut if warranted, echoed through investors’ minds. Washington Fed Brainard (“our job to keep the US expansion going”) and Chicago Fed Evans (“I see insurance reasons to talk about policy adjustments”) added to the dovish chorus. The US yield curve showed another bull steepening with daily yield changes ranging between ‑8 bps (2-yr) and flat (30-yr). The German yield shifts in more or less similar fashion with yields 2.9 bps (5-yr) to 0.2 bps (30-yr) lower. 10-yr yield spreads vs Germany narrowed marginally with Greece (+5 bps) and Italy (+6 bps) underperforming. The EC started fiscal disciplinary action against Italy over its public debt.
EUR/USD trading was driven divergent factors today. (Modest) USD weakness initially prevailed as markets considered yesterday’s Fed comments as raising chances on a rate cut later this year. Final PMI’s still suggest sluggish growth in the euro area, but at least didn’t bring any negative surprise anymore. EUR/USD touched a minor new correction top beyond yesterday’s intraday peak of 1.1277. Around noon, the euro faced setback on headlines that the EU commission concluded that Italy is in breach of the EU fiscal rules, which, after a long procedure, might lead to disciplinary action. EUR/USD (temporary) returned to the 1.1260 area. Early in US dealings, USD weakness soon returned to the forefront as the ADP private job report showed net job growth of only 27 K vs 185k expected. US yields tumbled again and weighed on the dollar, too. EUR/USD tested the 1.13 big figure but ran into resistance. Even so, next resistance at EUR/USD 1.1324 is looming on the horizon. USD/JPY initially outperformed on a better risk sentiment. A decline in yen interest rates was a (slightly) yen negative, too. However, the intraday bid in USD/JPY was abruptly aborted after the ADP job report. The pair is again trading in 108 area. The decline of the dollar still develops very orderly, especially against the likes of the euro, but the erosion of the USD momentum continues.
EUR/GBP trading was confined to a tight range in the 0.8855/0.8880 area. There was little high profile news on Brexit and on UK politics. The UK May services PMI printed marginally stronger than expected at 51.0. However, the report still suggests meagre growth and was not enough to trigger a positive reaction of sterling, in particular after very poor manufacturing and construction PMI’s earlier this week. EUR/GBP is trading in the 0.8860/65 area. Cable is regained the 1.27 area, but this was mainly due to USD weakness, not sterling strength.
News Headlines
The ADP jobs report disappointed hugely in May, printing at a mere 27 000. Markets anticipated a rise of 185 000 after an already stellar 271 000 in April. Details showed a negative contribution from the goods producing sector of – 43 000 (the bulk of which in construction) while services added 71 000 new jobs.
After weighing Italian arguments for its bigger than projected budget deficit, the European Commission ruled today that a disciplinary process against Italy is “warranted”. EU member states would first have to back the EC’s assessment before next steps can be taken. The EC also warned Greece, saying that the tax cuts and pension payouts introduced last month threaten the fiscal targets both parties agreed.
US ISM non-manufacturing business confidence came in better than expected (56.9 vs. 55.4), propelled by strong business activity and employment component. New orders marginally increased to a lofty 58.6.
