Markets
The focus on global markets initially was on the USD performance yesterday as the US currency dropped below key technical levels. The trade-weighted dollar dropped further below the 92.13 support (intraday low 91.75 area) and EUR/USD even temporarily tested levels just north of 1.20. However, the momentum of the move wasn’t that convincing and later in the session, investors were provided some good reasons to scale back USD shorts. The US August manufacturing ISM rose more than expected from 54.2 to a very solid 56. The employment component of the report remained in contraction territory, but the pace of the contraction slowed (46.4 vs 44.3). Later in the session, ECB’s Lane openly voiced its concern on the recent repricing in FX markets as he said that the EUR/USD rate matters for the EMU. Both events supported a rebound of the dollar and some profit taking in the euro. EUR/USD closed the session at 1.1912. The TW dollar (DXY) returned north of 92. On the bond markets lower than expected EMU inflation data reinforced an intraday decline in core EMU yields German yields declined 2-2.5 bp. Later in the session, US yields joined the move in Europe, despite a strong US ISM. Fed bond buying might have been in place. At the same time, there was probably some further repositioning on last week’s ‘post-Powell’ steeping of the yield curve. Fed’s Brainard advocating the need for further monetary (and fiscal) stimulus maybe also supported the move. At the end of the day, the US yield curve bull flattened with the 2-y yield unchanged and the 30-y declining 4.5bp. The decline was mainly driven by a correction in the inflation expectations component. US equities indices continued to outperform with the Dow (+0.76%), the S&P (+0.75) and the Nasdaq (+1.39%) all posting solid gains.
This morning, Asian equities again fail to fully profit from the strong performance on WS yesterday. Most indices hover between modest gains and losses. Australian equities outperform even as the economy contracted more than expected in Q2 (cf infra). The Aussie dollar extends yesterday’s USD inspired correction. AUD/USD is trading in the 0.7350 area compared to an intra-day top in the 0.7414 area yesterday. Recent protracted rise of the yuan against the dollar is also taking a breather (USD/CNY 6.83). EUR/USD is testing the 1.19 area.
The eco calendar is modestly interesting today. Concerning the data, the focus is on the US ADP labour market report. A solid rise of 1000K is expected. ECB’s Weidmann, Fed’s Mester and Williams are scheduled to speak. The Fed will published the Beige Book preparing September 16 policy meeting. Germany will sell € 4bn of 2025 bonds and is expected to launch a green bond. On core bond markets, we look out whether yesterday’s correction/decline in yields, which was meanly driven by an easing in inflation expectations, will continue. This story (lower real yields/higher inflation expectations of late) also was an important driver for the dollar. The USD decline apparently needs a breather. Solid US eco data might cause some further correction. However, assuming that US real yields will stay extremely low, or might even decline further, we don’t expect a big comeback of the dollar. The EUR/USD 1.1754/63 area is a first meaningful support on the charts. Sterling yesterday continued its outperformance against the euro. EUR/GBP is trading in the 0.89 area with next support at 0.8865. Sterling was a major beneficiary of the USD decline of late (outperformance of cable). Interesting to see how this pattern evolves as the USD rally slows.
News Headlines
Australian GDP fell by a record -7% q/q (-6.3% y/y) in the second quarter of this year. A steep drop in domestic demand contributed -7.2% percentage points to the figure. Capital formation another -1.1 pp. Exports were responsible for -1.4 pp while imports were suspended, delivering a positive contribution of 2.5 pp.
USTS Mnuchin called Pelosi to resume negotiations about additional fiscal stimulus. There haven’t been any talks since the last round broke down a month ago. Mnuchin said the economy urgently needs more fiscal aid but hasn’t come up with a new relief proposal other than the “skinny deal” of $500bn. Speaker of the House Pelosi rebuffed the phone call, saying “serious differences” remain and that she is only ready to compromise on a $2.2tn deal.
