Markets
Global core bonds treaded water today. The German Bund hovered sideways within a very narrow range with markets digesting yesterday’s ECB decision. Yields were roughly flat on shorter maturities as monetary policy is considered more or less a given short term (rate cut in September). The 10-yr and 30-yr yield decline 2-3 bps. Peripheral spreads widen with Italy (+6 bps) and Greece (+7 bps) underperforming. US Treasuries showed little more volatility going into the release of US Q2 GDP. The downleg following a slightly better than expected figure (2.1% QoQa vs. 1.8%, on strong private consumption, see below) reversed almost instantly however. A mixed bag of US price data were no inspiration for trading either. Solid Q2 growth, if anything, doesn’t really suggest aggressive Fed easing is necessary. Money markets refuse to completely rule out such a scenario though. A 15% chance is still priced in. The US yield curve bull flattens with yields flat (2-yr) to 1.5 bps lower (10-yr).
EUR/USD traded in some kind of no-man’s-land this morning. Markets had digested yesterday’s mixed ECB message and there were no important EMU data before the publication of the US Q2 GDP growth this afternoon. EUR/USD initially hovered in the mid 1.11 area, but the dollar strengthened slightly as US traders join the fray. It wasn’t that the easy to draw firm conclusions from the report for Fed policy and thus for USD trading. Headline growth dropped from 3.1% (QoQa) in Q1 to 2.1% In Q2, slightly above consensus (1.8%). As expected, strong consumption was partially counterbalanced by a negative contribution of net exports and inventories. The market reaction to the report was very modest. It contained no trigger why the Fed should cut its policy rate by more than 25 bp next week. USD yields and the dollar initially gained marginally, but move lacks any momentum. EUR/USD is trading in the 1.1135 area. USD/JPY is changing hands in the 108.70 area. The dollar remains favoured going into next week’s Fed meeting, but the US currency didn’t break any important technical laves yet. The EUR/USD 1.11 support survives and the trade-weighted dollar (currently 97.93) stays below this year’s peak levels 98.35 area.
Sterling staged a cautious rebound earlier this week as the event risk of the nomination of a new UK PM was out off the way. However, in retrospect, the move was no more than a limited technical correction. There were no follow-through gains for the UK currency. Yesterday, the UK currency even met a first ‘Johnson-related’ headline risk as EU leaders rejected the new PM’s call for better Brexit deal, causing a modest decline of sterling. Today, there were few high profile political headlines in the UK and no important eco UK eco data. Sterling trading was order driven The UK currency traded with a tentative negative bias Cable is changing hands near 1.1425. EUR/GBP is trading a few ticks stronger, currently near 0.8960.
News Headlines
US gross domestic product slowed less than expected in the second quarter. Headline growth printed at 2.1% QoQa, down from 3.1% in the first quarter. A very strong consumption was counterbalanced by an (expected) negative contribution of net exports and inventories. Government spending also supported growth. Investment disappointed slightly. The core PCE deflator, an important gauge of inflation at the Fed, rebounded from 1.1% to 1.8%
The Russian central bank as expected cut rates from 7.5% to 7.25% today. The central bank signaled more cuts to come “at one of the next meetings” to return to the neutral rate (6-7%) in the first half of 2020. However, the bank warned that upside inflation risks remain, mainly fiscally inspired, even as inflation gradually returned to the bank’s 4% target (4.7% in June).
