Markets
Core bond yields started the new quarter with a distinct upward bias. The move was initiated in Japan this morning. The BoJ tweaked its asset purchase program. It intends to buy less LT-paper with the clear aim of steepening the yield curve. Japanese investors picked up the signal from the BOJ. A government bond auction attracted mediocre demand and the Government Pension Fund will look for better/higher returns outside Japan. 10-y JGB yields jumped 5 bps and the move also spilled over to European and US bond markets. The EMU eco data remained weak as expected. The EMU manufacturing PMI was marginally upwardly revised, but at 45.7 (from 45.6) it can hardly be considered good news. EMU September headline CPI declined further to 0.9% Y/Y. Core inflation was unchanged at 1.0% Y/Y. The intraday decline of bonds slowed temporary as investors looked out whether the US would join the Japan/EMU bond correction. US yields preserved most of the intraday rise, but investors were a bit cautious to continue the trend going into the publication of the US manufacturing ISM. US yields were 2.5 (2-y) to 6 bp (10/30-y) higher before the publication of the Manufacturing ISM. The Bund curve also bear steepens with yields rising between 0.5 bp and 5 (bp) (30-y). 10-y intra-EMU yield spread changes are limited (-2 bp/+1bp). A disappointing ISM at the time of writing erases all intraday losses for the US Note future.
Moves in the major FX cross rates were much more modest compared to the swings in core bond yields. EUR/USD touched a minor new low, but there was again no aggressive follow-through selling. The EMU data had no lasting impact on EUR/USD . The pair was holding an intraday consolidation pattern near 1.09 awaiting the USD manufacturing ISM, before settling again above 1.09 after the release. Sterling showed two faces today. EUR/GBP initially hovered in the mid 0.88 area after yesterday’s sterling rebound. The UK manufacturing PMI rose to 48.3 from 47.4. So, activity in the sector still contracted, but the outcome was better than expected, probably as some companies again started building stocks ahead of the October 31 Brexit deadline. The report had limited impact on sterling. UK PM Johnson was said to prepare a concrete proposal in its negotiations with the UK, but there were no details to inspire directional GBP price action. During the afternoon session, quite an aggressive sterling selling wave kicked in. The move was said to be triggered by order-driven EUR/GBP buying. The pair currently trades again north of 0.89. Cable dropped to the low 1.22 area.
News Headlines
The Swedish and Norwegian manufacturing PMI’s disappointed. The Swedish PMI fell from 51.8 to 46.3 (vs 52 expected), the lowest level since the end of 2012. The decline represents the biggest monthly drop since the financial crisis. Details were bad as well with orders and production deeper into contraction territory and employment holding just above 50. The Norwegian PMI dropped from 53.9 to 50.4 (vs 53.5 expected) with orders component falling below the neutral line (48.4). EUR/SEK rose from 10.70 to 10.80; EUR/NOK from 9.91 to 9.96.
Chicago Fed Evans, who votes on policy this year, said he concluded that the economic situation called for the FOMC to cut policy rates 50 to 75 bps below the long term neutral rate (2.5%) and then leave policy on hold for a time. The Fed’s July and September rate cuts brought the policy rate at 1.75%-2%. Evans blew hot and cold over the economy, talking about delayed or canceled investments projects and some firms downsizing workforce plans, but also about healthy household balance sheets, elevated consumer confidence and a vibrant labour market.
The US manufacturing ISM dropped further in contraction territory in September, from 49.1 to 47.8 while consensus hoped on a return to neutral (50). Important subcomponents like new orders (47.3) and employment (46.3) emphasize the bleak picture in the sector.
