Markets:
Sterling’s fairy tale ended at EUR/GBP 0.8864 support (June low). The UK currency’s recent run was remarkable and that’s probably an understatement. The recent move was probably some euro weakness, but sterling nevertheless withstood dovish BoE comments by governor Bailey (negative policy rates possible) and Ramsden (central bank can boost QE significantly) and deadlocked brexit trade talks. The UK services PMI faced an unexpected downgrade from 60.1 to 58.8 today. EUR/GBP rose back above 0.89 in what could become a potential bullish engulfing pattern on the charts, implying a short term trend reversal. Cable (GBP/USD) earlier this week ran into 1.35 resistance, currently correcting below 1.33. EUR/USD flirted with the 1.18 big figure, but steadied afterwards. FX comments by ECB Chief economist Lane suggest that the single currency could be capped in the run-up to next week’s ECB policy meeting. We expect the ECB to sound dovish while downgrading inflation projections. However, it will probably become clear that the central bank is running out of ammo. That could trigger some fresh, unwarranted, euro strength. Eco data failed to rubberstamp trading today. Eurozone PMI’s showed divergence in recovery pace with Spain and Italy lagging behind. US weekly jobless recorded their lowest level (881k) since March, but that was mainly due to the new adjustment of methodology. The August US non-manufacturing ISM as expected returned some of last month’s impressive gains, declining from 58.1 to 56.9. Details showed an increase in the employment component, but it remains below the 50 boom/bust mark. European stock markets took off very strong, lifted by French president Macron’s €100bn stimulus bill, but lost some shine throughout the session. The EuroStoxx 50 touched the 3400 mark for the first time since mid-July.
Core bonds hold on to their positive momentum, but moves aren’t outspoken at all. The US yield curve bull flattens with yields losing 0.4 bps (2-yr) to 1.4 bps (30-yr). Interestingly, underlying dynamics changed with US inflation expectations today topping off while real yields try to find a bottom. The German yield curve moves in similar fashion with Bunds outperforming US Treasuries. German yields decline by 0.2 bps (2-yr) to 3.3 bps (30-yr). Peripheral yield spreads vs Germany barely changed.
News Headlines:
China came up with a plan to bolster its chip industry. Its preparing support for third-generation semiconductors for the next five year, people familiar said. The move comes as Beijing said it can no longer rely on US supply given the ongoing dispute between the world’s two largest economies over (among other things) future tech dominance.
Turkish inflation remains in the double digit area, rising marginally to 11.77% y/y in August. Core inflation accelerated from 10.25% to 11.03%. Projected to be around 9% at the end of the year, the figures add further pressure to the central bank to tighten policy to stem inflation and the currency slide but risk triggering president Erdogan’s wrath. The Turkish lira fell, setting a new all-time low against the dollar (7.44).
The German government is seeking a budget deficit next year of more than €80bn to sustain support for the economic recovery, two officials said. Finance minister mentioned the figure during a coalition meeting last week as preparations for next week’s draft budget are being made.
