- European equities traded sideways in a tiny range during European trading hours, but start losing ground in the US session. US stock markets opened marginally higher, unnerved by lacklustre earnings from several financial institutions.
- US consumer prices were unchanged in June as the cost of gasoline and mobile phone services declined further, pointing to benign inflation (1.6% Y/Y) that could cast doubts on the Federal Reserve’s ability to increase interest rates for a third time this year.
- US retail sales unexpectedly fell in June (-0.2% M/M) for a second straight month, which could temper expectations of strong acceleration in economic growth in the second quarter. US industrial production rose by 0.4% M/M in June, slightly beating consensus (0.3% M/M).
- The EMU’s trade in goods surplus inched up in May as import and export values both grew on the back of another bumper performance in Germany. Official trade figures from Eurostat show the bloc’s seasonally adjusted surplus in goods rose 2.1% from €18.6bn to €19.7bn in May. The reading was just below an average forecast of €20bn.
- The European Central Bank is keen to keep its asset purchases open-ended rather than setting a potentially distant date on which bond-buying will stop, to retain flexibility in case the outlook sours, three sources familiar with the discussion said.
- JP Morgan’s equity and fixed income trading revenues were at the low end of already low estimates, while investment banking fared better than expected. Its shares fell 1.4% pre-market. Citigroup posted a healthy beat on EPS but whiffed on equities trading. Its stock was little changed while Wells Fargo fell 1.3% after its earnings.
Rates
Core bonds profit from disappointing US eco data
Global core bonds traded with a minor upward bias in the run-up to key US eco data. The European eco calendar was empty and equity/commodity markets didn’t provide input from a risk sentiment point of view. The first, and most important, batch of US eco figures disappointed. Both headline US CPI and US retail sales failed to beat (rather low) consensus. Core bonds profited with US Treasuries outperforming German Bunds. Fed chair Yellen’s subtle warning on subdued inflation echoed in investors’ minds. The downside in US Treasuries now seems protected in the run-up to the July 26 FOMC meeting and with potential US political upheaval in mind (Russian investigation; health care bill). US industrial production rose marginally more than forecast (0.4% M/M), but couldn’t turn the tide going into the weekend.
At the time of writing, the US yield curve drops 2.8 bps (2-yr) to 5.3 bps (5-yr) lower. The belly of the US curve outperforms the wings. The German yield curve bull flattens with yields 0.9 bps (2-yr) to 3.5 bps (30-yr) lower. On intra-EMU bond markets, 10-yr yield spread changes versus Germany range between -2 bps and +2 bps with Italy (-5 bps), Spain (-6 bps) and Portugal (-6 bps) outperforming.
Currencies
USD suffers after data, but no EUR/USD topside break
Markets counted down to the US CPI and retail sales today. The US CPI was marginally softer than expected, but the retail sales showed quite a substantial miss. US yields and the dollar declined, but the damage could have been worse. Especially the rise of EUR/USD remains modest. The pair trades currently in the 1.1450 area. USD/JPY is hit hard (currently 112.40 area).
Overnight, Asian equities traded mixed, awaiting key US data later today. USD/JPY regained the 113 mark as markets expect the BOJ to maintain its cap on the 10-year government bond yield even as rates in other major economies are trending higher. However, the USD/JPY rise had no strong momentum. EUR/USD remained in wait-and-see modus, holding in the low 1.14 area
There were no important data in EMU. During the morning session, trading in European equities, bonds and in the major FX cross rates was confined to very tight ranges as investors didn’t want to add positions ahead of the key US CPI and retail sales data. EUR/USD settled just north of 1.14. USD/JPY hovered in the low 113 area.
US headline inflation was marginally softer than expected (1.6% Y/Y). The miss in the June retail sales was more substantial (-0.2% M/M vs 0.1% M/M expected). The combination of soft inflation and disappointing retail sales pushed US yields up to 5 bps lower. However, given the recent focus on inflation, the damage could have been worse. The dollar also ceded ground. Especially, USD/JPY was hit hard. The pair dropped from the 113+ area to fill bid in the 112.27 area. The loss of the dollar against the euro was more modest. The pair jumped higher in the 1.14 big figure, but a real test of the 1.1489 top didn’t occur (yet). The US production data released later in the session were slightly stronger than expected. As usual, the impact was limited. At best, they slowed the decline of the dollar. EUR/USD trades in the 1.1460 area, but trading remains volatile. EUR/JPY is changing hands in the 1.1460/65 area.
No UK specific news to guide sterling trading
There was hardly any UK specific news to guide sterling trading today. There were plenty of press articles on the UK accepting the principle of a financial settlement, but the debate had no impact on sterling trading. EUR/GBP held an extremely tight sideways range around the 0.88 pivot. EUR/GBP hardly profited from the post-US-CPI rebound of EUR/USD which can be seen as a tentative sign of underlying sterling strength. Cable rebounded north of 1.30 on the overall decline of the dollar.
