Markets
Core bonds trade listless today. The German Bund slightly outperforms US Treasuries. EMU CPI (0.3% both m/m and y/y/) was a tad higher than expected (see headline below) but was of zero importance to markets. Overall risk sentiment remained the dominant market theme once again. European dealings kicked off rather soft in the wake of renewed local lockdowns in Australia and more US states (New Jersey, Arizona) halting or reversing reopening plans. Sentiment improved gradually throughout the day as illustrated by equities turning positive around noon. But with little positive news circulating to support the move, it died out rather quickly. European stocks decline about half of a percent. US bond yields trade virtually unchanged. The German yield curve bull flattens with yields declining -1 bps (10-yr) to -1.3 bps (30-yr). Peripheral spreads tighten to core with Greece and Italy (-4 bps) outperforming. Italy’s Treasury sale of 10-year notes today was oversubscribed by more than two times, the most since 2012. That follows record investor demand of a new benchmark auction earlier this month.
The dollar gained against its major peers. On a trade-weighted basis (DXY) the greenback is trading shy of a one month high at 97.6. DXY touched key resistance at 97.84 (61.8% retracement of March low/high). A break higher would have important knock-on effects on other dollar pairs, including EUR/USD. The latter traded soft right from the European start, followed by a choppy trading session of lower lows intraday. EUR/USD was on the brink of forfeiting 1.12 amid weak and vulnerable investor sentiment but that level holds for now (1.122, down from 1.124 at opening). USD/JPY in on track for a 5-day winning streak before erasing most gains as US markets joined dealings. The pair trades unchanged near 107.53. Sterling was going nowhere for a large part of the session. EUR/GBP eventually pared some of the (technical) gains yesterday in the wake of UK PM Boris Johnson’s long awaited speech but remains north of 0.91. His plans to rebuild the nation leaked earlier and aren’t a real gamechanger. He also refrained from commenting the fiscal side of the plans, deferring the issue to Chancellor Sunak. He will provide an update of the budget next week. Bank of England’s chief economist Haldane also delivered a speech in which he said the economy is experiencing a stronger recovery than foreseen in the May scenario. He expects growth to have fallen 20% compared to the pre-coronavirus peak instead of the 27% penciled in last month. While risks are slightly more evenly balanced than in May, they are still tilted to the downside, especially in the labor market where the government’s furlough program is to be tapered in August, Haldane noted. The chief economist keeps an open mind whether more support is needed but warned for limitations of and the ‘dependency culture’ around monetary policy.
News Headlines
EMU headline inflation unexpectedly rose slightly to 0.3% Y/Y from 0.1% Y/Y. The May figure was the lowest in four years. The rise was mainly driven by a rise in energy prices. However, core/underlying measures of EMU inflation declined further. Underlying inflation excluding energy and food eased from 1.2% to 1.1%. The core reading ex food, energy, alcohol and tobacco even declined to 0.8% Y/Y. The ECB in its June forecast didn’t expect inflation to return to the 2% inflation target within the 2022 policy horizon.
Brazil’s unemployment rate rose to 12.9%, the highest in two years. However, underlying data suggest an even sharp and faster deterioration in the labour market situation as the country is extremely hard hit by the corona pandemic. For the first time since the data series began in 2012, less than half the people of working age were in work according to the IBGE agency. The underemployment rate, number of people out of work and those leaving the workforce all rose to the highest on record. The participation rate dropped to a record low 49.5%.
