Markets
Stock markets started the day once more on a solid footing. An upbeat statement on the implementation of the US-Sino phase one trade deal did the trick. Main European indices opened over 1% in positive territory, but failed to take out additional gains. Core bonds immediately traded a bit heavy, with EUR/USD initially reacting through the risk paradigm. EUR/USD, in a copy-paste move from yesterday, came within reach of 1.1850. Focus of the currency pair switched to the bond market though. Whereas the equity upleg stalled, the bond downleg didn’t. Sentiment among German business leaders continued improving in August. The Ifo indicator rose from 90.4 to 92.6, slightly beating consensus (92.1), in what was a 4th consecutive increase from the 74.4 April bottom. The Ifo Business Climate index remains below pre-COVID levels (95.8 in February). Details showed more optimism in both current conditions (87.9 from 84.5) and forward looking expectations (97.5 from 96.7) with all sectors (manufacturing, services, trade and construction) gaining. The German Bund ceded more ground after the Ifo-release. Confirmation that the German government neared an agreement on extending the shelf life of state wage-support programs from 12 months to 24 months added to the move. US Treasuries followed the path lower, with upcoming supply exercising some selling pressure. The US Treasury starts its mid-month refinancing operation tonight with a $50 bn 2-yr Note auction. Brent crude oil intensively tests the $45-46/b area, adding to the bond move. Splitting up nominal yields in real yields and inflation expectations shows that the US move is again mainly inspired by the inflation component. The US 10-yr real yield continues hovering near 1%. It also explains the lackluster intraday comeback of the dollar, which only went as far as 1.1805. As we finish redaction on this report, the greenback even gets another crack, returning to the intraday highs. EUR/GBP initially followed the EUR/USD trading pattern. Poor retail data from the CBI (see below) added to the UK currency’s woes. However, the move only went as far as yesterday’s intraday high (EUR/GBP 0.9040), before the FX pair returned to more familiar territory around 0.90. The daily scorecard for bond markets shows bear steepening in the US and in Germany. US yields increase by 0.9 bps (2-yr) to 2.5 bps (10-yr). German yields add 0.7 bps (2-yr) to 2.5 bps (20-yr). Peripheral yield spreads changes vs Germany vary between -4 bps (Greece) and +2 bps (Italy).
News Headlines
According to UK Confederation of British Industry (CBI), August reported retail sales volumes unexpectedly declined to -6 from +4 . Orders (at suppliers, -27 from -14) and stocks (related to expected demand, 19 from 29) also declined as did expected sales (-17 from -5). Retail firms are uncertain on “deteriorating household incomes and the risk of further local lockdowns potentially hitting them in the pocket for a second time”, according to a CBI economist. The CBI data are in contrast with stronger ONS retail data published last week. CBI also reported that retail employment declined at the fast rate since 2009 in the year to August and expects an even sharper decline in September.
The Hungarian central bank left its major policy rates unchanged holding the base rate at 0.6% and the overnight deposit rate at -0.05%. The MNB indicated that a review of the growth projections will be necessary in September after the sharper than expected -13.6% Y/Y economic contraction in Q2. The MNB intends to raise the weekly amount of QE government bond purchases. It will continue to make purchases in the long segment. In the event of a persistent deterioration in the outlook for growth, the MNB will deliver the required additional economic stimulus using its targeted instruments, i.e. the Funding for Growth Scheme Go! and the Bond Funding for Growth Scheme. The Forint declined further after the policy decision with EUR/HUF returning to the high 353 area.
