Markets
Global core bonds gained some ground yesterday. With no high profile news to guide markets, yesterday’s price action suggested cautiousness among investors ahead of the many events and data to be released. The upleg took place during early European dealings after which bonds developed a sideways trading pattern. Germany’s yield curve shifted south with yields changing -1.1 bps (2-yr) to -1.5 bps (10-yr). Peripheral spreads hardly changed (Italy +2 bps, rest unchanged). The US curve flattened marginally: yields changed +0.7 bps (2-yr) to -0.5 bps (10-yr). The economic calendar heats up today. US June PCE data shouldn’t come as a surprise as markets are able to distill it from last week’s GDP report. The bar for July’s Conference Board consumer confidence (125, up from 121.5) should be met given the strong labor market performance last month. We see risks for German HICP inflation (0.3% MoM, 1.2% YoY) tilted to the downside, a.o. due to the recent oil price evolution, which could cause some outperformance of the Bund. But even if US data turns out strong indeed, we think the UST downside is rather well protected as an important Fed meeting draws near. Any headlines emerging from the meeting between US and Chinese trade officials is a wildcard for trading.
The dollar held a tentative upward bias yesterday as markets awaited key events (restart of the US-China trade talks, Fed policy decision) and important eco data scheduled for release later this week. EUR/USD drifted lower close to the key 1.1100/10 support but the test was again rejected. Rising Brexit tensions in theory are a euro negative, but a steep EUR/GBP rally apparently caused positive spill-over effects on EUR/USD, too. EUR/USD even closed with a small gain at 1.1145. USD/JPY closed marginally higher at 111.78, despite a cautious US equity sentiment. The BoJ as expected left policy rates and forward guidance unchanged this morning, but added that it won’t hesitate to ease policy further if there is a greater chance the momentum for hitting the price target is lost. USD/JPY filled offers just below 109 before the BoJ decision, but the yen reversed initial losses, as some investors expected the BoJ to formally adapt an easing bias. USD/JPY trades again in the 108.60 area. Today, FX traders will also look out for comments from the Sino-US trade talks. Regarding the data, US consumer confidence is expected to rebound. In Europe, EC confidence indicators are expected to confirm a further loss in economic momentum. German July HCIP inflation is expected to ease to 1.2% . We see downside risks. FX investors probably will take a cautious approach, but the news flow might be more supportive for the dollar than for the euro. The EUR/USD 1.11 support will stay within reach with tomorrow’s Fed meeting to decide on a break (or not).
Sterling tumbled sharply yesterday as the new UK government is on collision course with the EU. Boris Johnson repeated that the Withdrawal Agreement is dead and that the Irish backstop arrangement has to go and said he won’t start Brexit talks unless the EU agrees to reopen the Brexit deal. EUR/GBP closed north of the 0.91 resistance and sterling selling continues this morning. Investors are adapting positions for a no-deal Brexit to be a likely scenario while chances on a compromise are receding. Sterling is at risk of being captured in some kind of free-fall unless signs some that one of the two parties is prepared to look for a compromise. It is not easy to see this coming anytime soon. EUR/GBP 0.9285 is the last defense ahead of the post-referendum peak in the 0.9415 area.
News Headlines
Swedish Q2 growth contracted -0.1 QoQ (1.4% YoY) vs. a 0.3% (1.9% YoY) expansion expected. That’s a pace equal to 2018Q3 and the slowest since 2013. French growth also came short of consensus, printing at 0.2% QoQ (1.3% YoY) vs. 0.3% (1.4%) expected as a rise in capex and public spending couldn’t offset a drop in consumption.
The Bank of Japan left policy and forward guidance unchanged, wrongfooting some who speculated the BoJ would tweak the latter. The central bank did add that it won’t hesitate to ease further if “momentum towards achieving the price stability target” is lost to the statement and trimmed its eco outlook.
