- European stock corrected lower with the German Dax clearly underperforming at -1.3% on euro strength. US stock markets opened modestly lower after Congress failed to repeal Obamacare.
- The UK inflation unexpectedly slowed to 2.6% Y/Y in June while a stabilisation at 2.9% was expected. The core CPI also failed to stay flat at 2.6% Y/Y and instead fell to 2.4%. This gives respite to BoE members concerned that price growth is getting out of hand.
- Prime Minister Theresa May told her ministers to show the "strength and unity" Britain needs and keep discussions private, blaming hostile briefing to journalists on colleagues who are "not taking their responsibilities seriously".
- The ZEW’s index on the current German economic situation dipped slightly, reaching 86.4 in July from 88 in June. That’s a slight miss compared to the forecast of 88. The expectations index also dipped from 18.6 to 17.5 (consensus 18). For the EMU, the ZEW for current conditions rose to 28.7 from 20.5 and the expectations slid to 35.6 from 37.7.
- The ECB’s Q2 Bank Lending Survey shows improvement in supply and demand conditions in the EMU banking sector. Credit standards were eased for corporate and mortgage loans while consumer loans tightened marginally. Banks expect a further easing of supply conditions and a continued strengthening of loan demand for Q3.
- Republicans in the US House of Representatives unveiled an outline of their 2018 budget proposals. The blueprint would allow an overhaul of the tax code to pass Congress without support from Democrats, along with a partial repeal of the Dodd-Frank reform law and $203 billion in savings from mandatory federal programs over 10 years.
Rates
Small upward bias in thin trading
Global core bonds traded with a small upward bias for second straight session, but volumes remain very low. US Treasuries outperformed German Bunds. Several "global" factors favoured core bonds. First, European equity markets corrected lower with the German Dax underperforming (-1.5%) on euro strength (caused by Trump’s failure to repeal Obamacare). Second, inflation readings (New-Zealand, UK) continue to slide from Q1 levels and disappointed on the downside of expectations. Additionally, the Riksbank downplayed their "policy turn" by confirming readiness to lower interest rates further. Third, eco data failed to paint a rosy picture. The German ZEW-indicator lost slightly more ground than forecast in July while US price indices printed mixed. Finally, investors keep Thursday’s ECB meeting in mind. We expect Draghi to stick to last month’s script and keep an announcement of APP’s future for Jackson Hole (end of August) and/or the September policy meeting. From a technical point of view, the German Bund tested 161.68 (previous neckline double top), but a break didn’t occur.
At the time of writing, the German yield shifts 1.1 bp to 1.4 bps lower with the belly of the curve slightly outperforming the wings. Changes on the US yield curve range between -0.4 bps (2-yr) and -3.6 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Italy (-2 bps) and Spain (-3 bps) outperforming.
Currencies
US politics pushing the dollar down the hill
Dollar selling remained the name of the game today. Trump administration’s inability to repeal Obamacare pushed the dollar off the hill and this move continued throughout the day. EUR/USD extended gains beyond the 1.1489/1.15 resistance and trades currently at about 1.1565/70. USD/JPY dropped below the 112 handle.
Overnight, the dollar came under broad pressure as divisions within the US Republicans made a repeal of Obamacare unlikely. This failure reinforced investors’ doubt about the administration’s ability to execute profound reforms. EUR/USD jumped from 1.1480 to the 1.1535/40 area. USD/JPY dropped to the low 112 area. The uncertainty also weighed on Asian equities, but losses were modest.
The repositioning from Asia continued in Europe as investors adapted positions further after the break of key technical levels in several cross rates (EUR/USD, AUD/USD ….). The dollar decline took a breather mid-morning, but the US currency never gave the impression that a rebound was imminent. German ZEW investor sentiment was slightly softer than expected but didn’t hurt the euro. On the contrary, a new wave of USD selling pushed EUR/USD to the 1.1560 area late in the morning. USD/JPY held up slightly better and drifted to the 112 level. Interest rate differentials are no big issue in the current USD decline. It was mostly follow-though repositioning due a loss of confidence in US politics with risks of negative fallout on the US economy.
US import prices were close to expectations and had no impact on USD trading. USD selling persisted as US investors joined the overnight USD decline. Risk sentiment also turned negative, pushing USD/JPY below the 112 barrier (currently 111.85). EUR/USD trades in the 1.1565/70 area, holding near the recent multi-month high. Dollar selling remains the way of least resistance.
Sterling nosedives as inflation eases
Sterling was mostly driven by technical considerations of late. Eco data came again in play today with the UK price data. UK headline inflation was flat on a monthly basis and declined from 2.9% Y/Y to 2.6% Y/Y (2.9% was expected). Core inflation also unexpectedly eased to 2.4%. Over the previous month, the debate on a BoE rate hike flared up (both inside and outside the BoE). A central bank of course isn’t supposed to make its policy decision dependent on the most recent (inflation) data. Even so, with the risk of 3.0% + inflation out of the way, today’s inflation report definitively eases pressure on the BoE to tighten policy anytime soon. EUR/GBP jumped from the 0.88 area and trades currently in the 0.8885 area. EUR/USD strength reinforced the move. Cable lost abound a full big figure despite broad-based US weakness, trading in the 1.3020 area.
