- European equities trade uneventful and are currently near opening levels flat today.
- Euro-area inflation slowed in June to 1.3% which is above the expected 1.2% but less than the 1.4% in May. The core inflation, which excludes volatile components like energy and food, increased to 1.1% from 0.9% in May.
- ECB Executive Board member Sabine Lautenschlaeger said that "monetary policy should already be making preparations for a return to a normal stance" and that the ECB "should adapt its communication accordingly". She warned for the risk of asset price bubbles that can result from unusually loose monetary policy.
- In its post-bailout review of Portugal, the IMF sounded an upbeat note. It praised progress in addressing risks and stabilising the banking sector. It also stressed the upturn in growth makes this year’s fiscal deficit target of 1.5 % of GDP "well within reach" after "strong efforts to contain spending" saw the deficit drop to an historic low last year.
- The core PCE deflator, the Fed’s preferred inflation barometer, fell for the third month in a row in May to 1.4% Y/Y, down from 1.5% Y/Y in April and matching expectations. The headline index fell to 1.4% (1.7% in April and 1.5% consensus). Despite the continued tightening in the labour market, price growth thus remains below target.
- German retail sales rose by some 4.8% Y/Y in May, bouncing back from the (revised) 0.4% decline in April and above forecasts. On the month, sales rose by 0.5% M/M, from 0.2% decline in April and a decent gap ahead of forecasts. However, the rise Y/Y can be attributed to an extra business day because of the Pentecost holiday timing.
- Canada’s economy grew for a sixth straight month in April, albeit at a slower pace, further underscoring policymakers’ view that conditions are in place for an interest-rate rise as soon as this summer. GDP for April grew 0.2% from the previous month, down from the 0.5% pace recorded in March.
Rates
Lousy attempt to correct higher fails
Core bonds markets stabilized after this week’s heavy sell-off, allowing equity and currency (EUR/USD) markets time to recover from the past sessions. An attempt to correct higher was blocked around European noon, pulling core bonds back towards today’s opening levels which are close to the sell-off lows. Hawkish comments by ECB Lautenschlager, who argued in favour of policy normalisation and suggested that the ECB spoke with one voice, could have played a role. EMU (CPI) and US (PCE) inflation didn’t directly influence dealings. Core EMU inflation rose unexpectedly to 1.1% Y/Y while the US PCE deflator fell to 1.4% Y/Y to 1.7% Y/Y. All in all, most inflation outcome were near consensus though. US investors ignored personal income and spending data as well and are preparing for a long weekend. US markets are closed next Tuesday for the 4th of July holiday, suggesting low activity on Monday as well despite the release of the manufacturing ISM.
At the time of writing, the German yield curve steepens with yield changes ranging between -0.3 bps (2-yr) and +1 bp (30-yr). The US yield curve steepens as well with the 2-yr yield 0.8 bps lower and the 30-yr yield 1.5 bps higher. On intra-EMU bond markets, 10-yr yield spread changes are close to unchanged.
The Italian debt agency tapped the on the run 5-yr BTP (€2.5B 1.2% Apr2022) and launched a new 10-yr BTP (€3.85B 2.05% Aug2027). The combined amount sold approached the upper band of the targeted €6-7B, but the auction bid cover was rather low (1.32). Addtionally, the Treasury sold €2.5B floating rate notes (CCTeu Apr2022).
Currencies
EUR/USD rally pauses ahead of a long US weekend
The strong three-day EUR/USD rally ran into resistance today, but without signals of a dollar counter. Multiple euro area and US eco data couldn’t seduce investors to continue the euro buying spree. US markets are closed next Tuesday for the 4th of July holiday and many traders and investors will make it a long weekend. Appetite to take additional positions was missing, also because it’s the final the day of the quarter. The picture on the bond and equity markets was similar: quiet technical trading. US and German yields moved slightly higher, but the differentials were negligible. European equities corrected somewhat higher in the morning session, but slid again lower top openings levels in the afternoon session. USD/JPY traded mostly in the red between 111.73 and 112.20, but without a distinct direction. The equity moves were too small to impact the pair which trades currently near opening levels at 112.20.
After an uneventful Asian session, EUR/USD was hit by some modest profit taking, pushing the pair from opening levels around 1.1440 to an intraday low at 1.1390 at European noon. Afterwards, the pair cautiously struggled higher to just above 1.14. A hawkish speech of ECB Lautenschlager may at the margin helped supported the euro, but her views are well-known (minority in the ECB) and thus generally unable to give the euro strong direction. US personal consumption and income printed near expectations and so were the (core) PCE deflators. EUR/USD remained just above the 1.14 level.
No post Carney follow-through gains for sterling
Cable approached key 1.3044 resistance overnight, but a real test didn’t occur, sending GBP/USD lower again. UK data made no difference: Outdated Q1 GDP was confirmed at a weak 0.2% M/M, while the April index of services and Q1 business investment were in line with expectations. Cable trades currently at 1.2975 versus opening levels around 1.3007. EUR/GBP went initially lower, mirroring the decline in EUR/USD. However, the pair turned North well ahead of EUR/USD. When EUR/USD turned, sterling erased all remaining losses and trades now unchanged on the day at 0.8797.
